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Elements of Company Law

Subject: ELEMENTS OF COMPANY LAW Credits :4
SYLLABUS

Company and its Formation

Public and Private Companies, Formation of a Company, Promoters, Nature and Types of Companies

Principal Documents

Prospectus, Memorandum of Association, Articles of Association

Capital and Management

Directors, Allotment of Shares, Share and Loan Capital

Meetings and Winding Up

Meetings and Resolutions, Company Secretary

Suggested Readings:

1. Ramaih, A Guide to Companieis Act, Wadhwa Publications

2. Avatar Singh: Company Law, Eastern Book company, Lucknkow

3. Anantha Raman, Lectures on Company Law, Wadhwa and Company

4. Tadon M.P. ,Company Law, Allahabad Law Agency, Allahabad

 PART 1. COMPANY AND ITS FORMATION
CHAPTER 1

Nature and Types of Companies

STRUCTURE
Learning objectives
Definition of company
Main characteristics of a company
One-man company
Lifting the corporate veil
Distinction flanked by a company and a partnership
Types of companies
Association not for profit
Illegal associations
Review questions

LEARNING OBJECTIVES
After learning this chapter, you should be able to:
Describe a company,
Describe the features of a company,
Explain the concept of corporate veil,
Distinguish flanked by a company and a partnership
Describe the several types of companies, and
Describe an illegal association

DEFINITION OF COMPANY
The term 'company' implies an association of a number of persons for some general
objector objects. In information, the purposes for which people may wish to associate are
multifarious but the term „company‟ is normally reserved for those associated for economic
purpose i.e., to carry on a business for gain. Partnerships often describe themselves as 'A, B. C
and Company'. Though this does not create the firm a company in the legal sense of the word,
they at only indicating that there are other persons in the association,

In legal terminology, a company means a company incorporated or registered under the

Companies Act, 1956 or under any of the, earlier companies Acts; Section 3(l) (i) of the
Companies Act, 1956 states that a Company means a company shaped and registered under
the Act or an existing Company. An existing Company means a Company shaped and
registered under any of the previous Companies Acts. This definition, though, is not
exhaustive because it does not reveal the c features of a Company.

A company is described a 'body corporate' because, as a consequence of incorporation,

the big number of members who constitute the company are legally merged into one body
which has a separate identity of its own. In its legal form, a company is an artificial person
created through law. It has a separate identity self-governing of its members. This artificial
legal person is entitled to several rights and incurs several liabilities like any other ordinary
human being.

A company has been defined through Lord Justice Lindley as follows: Esy a company is
meant an association of several persons who contribute money or company‟s worth to a
general stock and employs it in some trade or business, and who are the profit and loss (as the
case may be) arising there from. The general stock s c contributed is denoted in money and is
the capital of the company. The persons who contribute it, or to whom it belongs, are
described members. The proportion of capital to which each member is entitled is his share.
Shares are always transferable a through the right to transfer them is often more or less
restricted."

Another good definition has been given through Chief Justice Marsh all. According to
him, "a company is a person, artificial, invisible, intangible, and existing only in the eyes of
law. Being a mere creature of law, it possesses only those properties which the charter of its
creation confers upon it, either expressly or as incidental to its very subsistence."

According to Lord Haney, "A company is an incorporated association which is an

artificial person created through law, having a separate entity, with a perpetual succession and
a general seal."

From the definitions, it is clear that a company has a corporate and legal personality. It is
an artificial person and exists only in the eyes of law. It has a self-governing legal entity, a
general seal, and perpetual succession.

MAIN CHARACTERISTICS OF A COMPANY

On analyzing the several legal and juristic definitions of the term „company‟ you will
observe that a company shaped and registered under the Companies Act has sure special
characteristics which distinguish it from the other forms of organisations. The main features of
a company are as follows.

Creation of Law

A company is an association of persons who have agreed to form the company and
become its members or shareholders with the substance of carrying on a lawful business for
profit. It comes into subsistence when it is registered under the Companies Act.

Separate Legal Entity

In the eyes of law, a company shaped and registered under the Companies Act has a
separate legal entity. After registration, the company is treated as an artificial person because
in reality no such, natural person exists. It is invisible, intangible and without any physical or
natural subsistence. Although a company is a legal person having a nationality / and domicile,
it is not a citizen.

The legal status of a company has been aptly described through the Supreme Court of
India in Tata Engineering & Locomotive Co, Ltd v. State of Bihar as follows:
"The corporation in law is equal to a natural person and has a legal
entity of its own. The entity of the corporation is entirely separate from
that of its shareholders; it bears its own name and has a seal of its own;
its assets are separate and separate from those of its members; it can
sure and is sued exclusively for its own purpose".

Even though the company lacks a physical subsistence, for purposes of law it is regarded
as a self-governing legal person who has a personality of its own and is dissimilar from the
members constituting the company. So, a company can enter into a contract with any member
of the company. A person can own its shares and also be its creditor. A shareholder cannot be
held liable for the acts and debts of the company even though he virtually holds the whole
share capital. No member can either individually or jointly claim any ownership rights in the
assets of the company throughout its subsistence or on its winding up. Likewise, creditors of
the company are creditors of the company alone and they cannot take action against the
members of the company.

Even where a single shareholder owns virtually the whole of its shares, the company is to
be treated as a separate legal entity and is to be differentiated from such a shareholders. This
can be understood better through referring to the case of Salomon vs. Salomon and Company
Ltd. Mr. Salomon was running a shoe business in England. We shaped a company recognized
as 'Soioman and Co. Ltd.‟ It consisted of Saloman himself, his wife, his four sons and a
daughter. The shoes business of Mr. Saloman was sold to the company for £30,000. Mr.
Saloman received from the company purchase price in the form of £20,000 fully paid shares
of £1 each and £10,000 in debentures which accepted a floating charge in excess of the assets
of the company. One share off 1 each was subscribed for in cash through each member of
Saloman‟s family. Saloman was the managing director of the company. Throughout the course
of business, the company became liable for some unsecured loan. The company ran into
financial difficulties after some time and went into liquidation within a year. On winding up,
the assets realized £6,000. The company owed £10,000 to Mr. Saloman and £7,000 to
unsecured creditors. Therefore, after paying off the debenture holder (Mr. Saloman), nothing
was left for unsecured creditors. The creditors claimed priority in excess of the debentures
contending that Mr. Saloman and Saloman and Co. Ltd. were one and the similar person, the
company was only a facade to defraud the innocent creditors. Mr. Saloman should not so, be
treated as a secured creditor. The Mouse of Lords held that the company had been validly
constituted and it had an self-governing subsistence separate from its members. So, Mr.
Saloman was entitled to be paid his dues first as a secured creditor. It was observed that the
business belonged to the company and not to Mr. Saloman. The company and Mr. Saloman
enjoyed separate legal entities. The information that the members were from one single family
had no bearing upon the validity of the company.

In T.R. Pratt (Bombay) Ltd. Vs E.D. Sasoon and Co. Ltd., it was observed that under the
law, an incorporated company is a separate entity, and although all the shares may be
practically controlled through one person, in law a company is a separate entity. Likewise in
Abdul Haq v Das Mal, an employee sued a director of the company for the recovery of the
amount of salary due to him. It was held that he could not succeed because the remedy lied
against the company and not against the directors or members of the company.

As a consequence of separate legal entity, the company may enter into contracts with its
members and vice-versa. Therefore, a shareholder can be the creditor of the company.

Limited Liability

A major advantage enjoyed through a company is that the liability of its members is
limited. You will later on revise that on the foundation of liability, companies may be
classified as
Companies limited through shares; and
 Companies limited through guarantee.

In the case of former the liability of every member of the company is limited to the
amount of shares subscribed through him. If the member has paid full amount of the face
value of the shares subscribed through him, his liability shall be nil and he cannot be asked to
contribute anything more. Likewise, in the case of a company limited through guarantee, the
liability of the members is limited upto the amount guaranteed through a member.
Company and its Formation Company can never come to an end. You learnt that a
company is the creation of law. It can also be brought to an end through the procedure of law.

Transferability of Shares

The shares of a public limited company are freely transferable. A shareholder can transfer
his shares to any person without the consent of other members. Under the articles of
association, even a public limited company can put sure restrictions on the transfer of shares
but it cannot altogether stop it. A shareholder of a public limited company possessing fully
paid up shares is at liberty to transfer his shares to anyone he likes in accordance with the
manner provided for in the articles of association of the company. Though, a private limited
company is required to put sure restrictions on transferability of its shares.

General Seal

In view of the information that a company is an artificial person and cannot sign its name
on a contract, every company is required to have its own seal. The general seal of the
company is of great importance. It acts as the official signature of the company. A metallic
seal should be used. Every company necessity has a general seal with its name engraved on
the similar. The seal acts as a substitute for the signature of the company. Any document
which does not bear the general seal of the company is not binding on the company.

May Sue or be Sued

As juristic person, company can sue and be sued in its own name. This is so because a
company has a separate legal subsistence. A company may enter into contracts and can
enforce the contractual rights against others and it can be sued through others if it commits a
breach of contract.

ONE-MAN COMPANY
 A company in which a single individual holds the whole, or virtually the whole, of the
share capital is termed as 'one-man Company'. Though there may be other members also, but
these members are usually his relatives, friends, or nominees. This dominating person is
usually the managing director of the company and has full control in excess of the company.
This is a means to enjoy the benefits of the corporate status and limited liability of the
company. Although only one person runs the whole illustrate in such a company, yet such
kind of companies are legal.

LIFTING THE CORPORATE VEIL

You learnt that a company has a separate legal entity self-governing and
dissimilar from its members. The principle of separate legal entity was well
recognized in the well-known case of Saloman v. Saloman and Co. Ltd. On
incorporation a row of demarcation or a veil is drawn flanked by the company
and its members. In information, a company is an association of persons and such
persons are the real beneficial owners of all the corporate property. Real
persons behind the company are disregarded once they have shaped a
company and given to their association the status of a legal entity.
As a consequence of this separate legal entity, the company enjoys many
advantages which you have studied in foregoing paras. But when the
company starts by the corporate veil for improper conduct, or to protect
fraud or to justify wrongs, the law disregards the corporate veil and looks at

the persons behind and treats the company and its members as similar persons.
The corporate veil is said to be lifted when the court ignores the company and
concerns itself directly w ith the members of the company. Prof. Gower has
observed, "When the law disregards the corporate entity and pays regard
instead to the individual members behind the legal facade, it is recognized
as lifting the veil of corporate personality."
You should, though, note that the powers of the court to lift the corporate
veil are purely discretionary. The court will lift the corporate veil when it is in
the public interest to do so. The circumstances and cases in which the
corporate veil will be lifted may broadly be classified under the following
two heads:
Under express statutory provisions, and
 Under judicial interpretations

Under Express Statutory Provisions

The Companies Act, 1956 itself gives for sure cases in which the
directors or members of the company may be held personally liable. In such
cases, while the separate entity of the company is maintained, the directors
or members are held personally liable beside with the company. These cases
are as follows:
When the number of members falls below statutory minimum: According to Section 45
of the Act if at any time the number of members of a company is
reduced below the statutory requirement and the company carries on
business for more than six months while the number is so reduced,
every person who was member of the company throughout the time
when it accepted on business after those six months and who was
aware of this information, shall be severally liable for all debts of the
company contracted throughout that time. It should be noted that the
personal liability of the members commences only after six months of
carrying on business with reduced members and this liability is only
for the debts contracted after those six months. From this you will see
that although the company continues to enjoy its separate personality
but loses the significant characteristic of limited liability of the
members of a company. Such a situation entitled the creditors to
disregard the separate entity of the company, and the creditors can take
action against the members directly.
Non disclosure of representative capability: As a rule when an officer
of a company or any person on its behalf signs or authorizes to be
signed, on behalf of the company, any bill of swap, hundi, promissory
note, endorsement, cheque or order for money or goods, it is
incumbent on such person that he should clearly disclose the name of
the company on whose behalf he is acting. If the officer or the
authorized person fails to disclose his representative capability, such
officer, or person shall be personally liable for the amount due if the
company refuses to pay it. For instance, a bill of swap drawn upon a
company is accepted through a director in his personal capability i.e.,
without disclosing that he is accepting the bill on behalf of the
company, such a director shall be personally liable for the bill.
Holding and subsidiary company: When one company controls the
composition of the board of directors of another company or holds
majority of its shares, the former is described the holding company and
the latter as subsidiary company. In common, a subsidiary company is
altogether treated as a parate entity and the holding company is not
liable for its acts. But, under Section 212 of the Act, every holding
company is required to disclose to its shareholders he accounts of its
subsidiaries. It requires that the copies of balance sheet, profit and loss
account, director‟s statement, and auditor‟s statement of each
subsidiary company be attached to the balance sheet of the holding
company. Therefore, companies under the similar group are treated as
one entity disregarding the rule that each subsidiary company has a
separate legal entity.
For investigation into affairs of related companies: Section 239 of the
Act gives that if an inspector is appointed through the Central
Government of investigate the affairs of a company, he shall also have
the power to investigate into the affairs of related (subsidiary)
companies in the similar management. The power to do so may
therefore lift the veil of incorporation.
For investigation of ownership of a company: When the Central
Government feels it necessary to know in relation to the membership
of any company and also some other matters relating to the company
with the substance of determining true persons who are (or have been)
financially interested in the success or failure of the company or who
are (or have been) able to control the policy of the company, may
appoint one or more inspectors to investigate and statement on these
matters (Section 247). This will be done through lifting the corporate
veil so as to discover out the true persons controlling it.
 Fraudulent conduct of business: Under Section 542 of the Act if in
the course of the winding up of a company, it appears that any business
of the company has been accepted on with the intention to defraud its
creditors or any other persons, in such a case the persons who were
knowingly parties to such acts may be held personally liable for any
debts and other liabilities of the company. In such a situation, the court
may disregard the legal entity of a company and create the fraudulent
persons personally liable for the debts of the company

Under Judicial Interpretations

Besides the mentioned circumstances, the courts have allowed the lifting of corporate veil
for proper administration of taxation laws, estate duty laws, wealth tax laws etc. and also in
some other circumstances. Let us now revise some of the cases where the corporate veil was
lifted.
For determination of the character of the company: Sometimes,
particularly throughout war flanked by countries it becomes necessary
to ascertain the character of sure companies. At such times the courts
are justified in lifting the corporate veil of a company which is
controlled through alien enemy. In this method a company registered
in India may be declared alien enemy if it is establish that the persons
controlling such a company are citizens of an enemy country. For
instance in Daimler Co, Ltd. v. Continental Tyre and Rubber Co. Ltd‟s
case, a company with the name Continental Tyre and Rubber Co. Ltd.
was registered in England. The substance of this company was to sell
tyres in United Kingdom, which were, manufactured in Germany
through a German company. Majority of the shares of this company
were held through Germans. Besides this, all the directors of the
company were German residents. When the First World War broke
out, the company filed a suit to recover a trade debt. The court came to
the conclusion that the company was an enemy company because the
effective control of the company was in the hands of Germans who
were alien enemy. Hence, the claim of the company was disallowed on
the ground that it was against public policy to allow alien enemies to
trade, through by the corporate veil.
For prevention of fraud or improper conduct: The courts will allow
lifting of the corporate veil if the purpose of the company is to avoid
legal obligations or to defraud the creditors. In the case of Gilford
Motor Co. Ltd. v Horne, Horne was appointed as a managing director
of Gilford Motor Co. with the condition that he would not solicit or
entice absent the customers of the company, so extensive as he was in
the employment of the company and afterwards. After leaving the
company, Horne shaped another company which was to carry on the
similar business. This new company of Horne solicited the customers
of Gilford Motor Co. Ltd. In a suit filed through Gilford Motor Co.
Ltd. against Horne to restrain him from soliciting the business, the
court came to the conclusion that Horne had created the company for
his own benefit and to solicit the customers of his employer's company.
The court issued an injunction against Horne and his new company and
held that the new company was a mere cloak for the purpose of
enabling the defendant to commit a breach of his contract that he
would not solicit the business of his employer's company. Likewise,
where a dummy company was shaped to avoid a legal obligation, the
court lifts the corporate veil. (Jones v Lipman) Therefore, where a
company is shaped to defraud, the court will lift the corporate veil and
look into the true ownership of the company.
For protecting the revenue: The court will allow piercing of corporate
veil if it is of the opinion that the company has been shaped for
evading the tax or to circumvent tax obligations. If such is the case, the
court will disregard the corporate entity and would instead hold
individual members liable to fulfill the revenue obligations. In Re Sir
Dinshaw Manekjee Fetit‟s case the assesses, Sir Dinshaw who was a
very rich man, was earning vast dividend and interest income. He
shaped four private companies and entered into an agreement with
each company to hold a block of investment as this agent. Under the
arrangement the income received was credited in company‟s account
and the company handed the amount back to him as a loan (which was
never repaid). In this method he divided his income in four parts in
order to reduce his tax liability. The court ignored the corporate facade
of these companies and held that the company was nothing more than
the assesses himself. Sir Dinshaw was held the owner of total income
and liable to pay tax.
Where company is shaped to act as an agent of its members: As a
common rule, a company is not an agent of its shareholders or of
another company. But, under sure circumstances, a company may be
regarded as an agent or trustee of its members or of another company.
In such a situation, for the acts done through the company, it will be
the members who would be responsible and not the company. In Re
F.G. Films Ltd.'s case, an American company financed and produced a
film 'Monsoon' in India. But, technically, the film was made in the
name of a company incorporated in England. This British company
had only a capital of £100 divided into £100 shares of £1 each, of this,
90 shares were held through the President of the American company.
The Board of Trade declined to register the film as a British film. The
view of the Board of Trade was upheld through the court. The court
held that the British company acted only as an agent of the American
Company which was the true maker of the film.
Avoidance of Welfare Laws: The courts have disregarded of the
separate legal personality of the company when the company's self-
governing status was being used as a device to reduce the amount
payable through the company to defeat the provisions of welfare laws,
such as payment of bonus to its workmen. In the case of Workmen
Employed in Associated Rubber Industries Ltd. Bhavnagar v. The
Associated Rubber Industries Ltd., Bhavnagar, and Another, a new
company was shaped with no assets of its own except those transferred
to it through the principal Company and its Formation company. The
new company had no business of its own, it received dividend on
shares transferred to it through the principal company. Therefore, the
principal company was able to reduce its gross profits and
 consequently the amount of bonus payable to workman was also
reduced. The Supreme Court rejected the self-governing status of the
new company and directed that the amounts paid to the new company
as dividend shall also be taken into account while determining the
gross profits of the principal company. The court held that "in every
case where ingenuity is expected to avoid taking and welfare
legislations, the court will go behind the smoke-screen and discover
the true state of affairs.

DISTINCTION FLANKED BY A COMPANY AND A

PARTNERSHIP
You learnt that a company is an artificial person created through law, with limited
liability and perpetual succession as its main characteristics. Let us now revise the distinction
flanked by a company and partnership; the main points of variation flanked by the two are as
follows:
Formation: A company comes into subsistence when the Registrar of
Companies issues the certificate of incorporation. This certificate is
issued when the Registrar is satisfied that all the formalities with
respect to registration of company have been complied with in
accordance with the provisions of the Companies Act, 1956. A
partnership, as you have already read can be shaped through an
agreement flanked by the partners. Registration of a partnership firm is
not compulsory under the Indian Partnership Act, 1932.
Membership: Minimum number of members required in case of
private and public company is two and seven, respectively. Maximum
number of members in case of private company is fifty (excluding its
past and present employees) and in case of a public company there is
no statutory limit. But in the case of partnership, minimum number of
person required is two and maximum number of partners is restricted
to ten in the case of partnership occupied in banking business and
twenty in the case of a non-banking business.
Legal status: After incorporation, in the eyes of law, a company is
recognized as a separate legal personality dissimilar from the members
who constitute it, whereas the partnership does not acquire any juristic
status and continues to be only an association of persons even after
registration. In easy words, the partners and the firm are one and the
similar.
Liability: As you have already read in this unit that in the case of a
company, the liability of its members is limited to the value of shares
held through them or upto the amount of guarantee given through
them. A creditor of a company cannot proceed against the private
properties of a member. Though, in case of a partnership, the liability
of partner is unlimited as well as joint and many. The creditors of a
firm may proceed against the individual property of any partner for the
recovery of their debts which had been incurred in the ordinary course
of business.
Transfer of Shares: In the case of a public company, the shares are
freely transferable. But, in the case of partnership, a partner cannot
transfer his share in the firm without the consent of other partners.
Perpetual succession: A company enjoys perpetual succession. The
life of a company does not come to an end if one or more of its
members die or become of unsound mind or are declared 'insolvent'.
But in the case of a partnership, unless otherwise agreed, on the
happening of any of these contingencies, the partnership firm comes to
an end.
Management: The affairs of the company are supervised through a
Board of Directors. Members of the company have no role in
managing the affairs of the company. While in partnership, every
partner has a right to participate in the management of the partnership
business.
Agency of members: Shareholders are not agents of the company
whereas every partner is an agent of the firm and has the implied
authority to bind other partners through their acts done in the ordinary
course of business.
Property: In the case of a company, the property of the company is in
the name of the company and is owned through it. It does not belong to
the individual shareholders of the company. Throughout the life time
 of the company, no shareholder has any legal or equitable interest in
any property of the company. But in the case of partnership, the
partners are the joint owners of the property of the firm.
Statutory necessities: A company is required to comply with several
statutory formalities, such as convening the statutory meeting and
delivery of statutory statement to the Registrar of Companies, whereas
a partnership is not required to perform any such statutory obligations.
Dissolution: The corporate subsistence of a company can be brought to
an end only in accordance with the provisions of the Companies Act,
1956. A partnership, being a creation of an agreement, can be
dissolved at any time through an agreement.
Governing legislation: A company is governed through the Companies
Act, 1956, while a partnership is governed through the Indian
Partnership Act, 1932.

TYPES OF COMPANIES
Companies can be classified according to several bases. These are:
On the foundation of incorporation
On the foundation of liability
On the foundation of control

Look at Figure 1.1 cautiously to have an overall view of the dissimilar types of
companies.
On the Foundation of Incorporation

Depending upon the mode of incorporation, joint stock companies may be divided into
the following three categories:
Chartered company: A company incorporated under a special charter
granted through the King or Queen of England is described 'chartered
company'. A chartered company is regulated through its charter and the
Companies Act does not apply to it. The charter also prescribes the
nature of business and the powers of the company. The well-known
examples of chartered company are the East India Company and the'
Bank of England. This kind of company cannot now be shaped in
India.
 Statutory company: A statutory company is one which is created
through a special Act of Parliament or a State Legislature. Such
companies are usually shaped for achieving a purpose related with
public utilities. The nature and powers of such companies are laid
down in the special Act under which they are created. Though, the
provisions of the Companies Act are also applicable to them in so
.distant as they are constant with the provisions of the special Act.
Such companies; need not have a memorandum of association. A
statutory company has also a separate legal entity and it is not required
to use the word 'limited' after its name. The audit of such companies is
mannered under the control and supervision of the Auditor Common of
India and the annual statement of working are required to be placed
before the Parliament or State legislature, as the case may be. Well-
known instance of such companies are Reserve Bank of India, Unit
Trust of India, The Life Insurance Corporation of India, State Trading
Corporation, The Food Corporation of India, State Bank of India etc.
Registered or incorporated company: A registered company is one
which is registered in accordance with the provisions of the Companies
Act of 1956 and also comprises the existing companies. Through
existing company we mean a company shaped and registered under
any of the previous Acts. A registered company comes into subsistence
only when it receives the certificate of incorporation. Registered
companies are governed through the provisions of the Companies Act.

A registered company may either be a private limited company or a public limited

company. A private limited company is one which through its articles of association (a)
restricts the right of transfer of shares (b) limits the number of its members to fifty (not
including the present or past employees) (c) prohibits any invitation to the public to subscribe
for any shares or debentures of the company. On the other hand, a public limited company is
one which is not a private company. The minimum number of members to form a private
company is two, while for the public company the minimum number is seven.
On the Foundation of Liability

On the foundation of liability, an incorporated company may either be (i) a company

limited through shares, or (ii) a company limited through guarantee, or (iii) an unlimited
company.
Company limited through shares: A company in which the liability of
its members is determined on the foundation of the amount, if any,
remaining unpaid on the shares held through them is termed as a
company limited through shares'. Such companies are popularly
recognized as limited liability companies. The liability of the members
is limited to the extent of nominal value of shares held through them. If
a member has paid the full amount of shares, then his liability shall be
nil. Let us create th]is clear through taking an instance. Suppose you
buy 100 shares of a company of the face value of Rs. 10/each. In this
company your liability is fixed to the tune of Rs. 1000 only. If you pay
(when described through the company) Rs. 600 to the company, you
are now liable to pay the company only Rs. 400, this being the amount
unpaid on your shares. When you have paid the whole amount of Rs.
1,000 (which means when your share have been fully paid up) your
liability shall be nil. The liability can be enforced against the members
of the company throughout the subsistence of the company or
throughout the winding up of the company.
Company limited through. guarantee: Section 12(12) (b) of the Act
gives that a company having the liability of its members limited
through its memorandum to such amount as the members may
respectively undertake to contribute to the assets of the company in the
event of its being wound up is termed as a „company limited through
guarantee'. Such companies are usually shaped for the promotion of
art, science, culture, sports, etc. It is motivating to note that in a
company limited through guarantee, a member is required to pay the
amount guaranteed through him only if the company is wound up
while he is a member or within one year after he ceases to be a
member. Therefore, the members cannot be asked to pay the
guaranteed amount throughout the life time of the company. The
 memorandum of association of a company limited through guarantee,
should state that each member of the company undertakes to contribute
to the assets of the company in the event of its being wound up. You
should, though, keep in mind that a member cannot be asked to pay an
amount in excess of the amount for which he has given the guarantee.
Such a company may or may not have share capital. If a company
limited through a guarantee is shaped without any share capital, then
the members would be liable to pay only the guaranteed amount and
that too when the company goes into, liquidation. But if the company
limited through guarantee is shaped will share capital, then the
members are also liable to pay the unpaid amount on their Mares. Bul
the guaranteed amount can be described up only at the time of winding
up of the company.
Unlimited company: A company where the liability of members is
unlimited i.e., there is no limit on the liability of members is termed as
an unlimited company. The members of such companies may be
required to pay company's losses from their personal property. Because
such companies have separate legal entity, its creditors cannot file a
suit against the members directly. The creditors will have to apply to
the court for the winding up of the company and then the liquidator
will direct the members to contribute to the assets of the company to
pay off its liabilities. As in the case of a company limited through
guarantee, here also an unlimited company may or may not have a
share capital. If the company has share capital, the articles of
association of the company necessity specify the amount of share
capital with which the company is to be registered. Such a company
necessity has its memorandum and articles of association. The articles
of association necessity specify the number of members with which the
company is to be registered.

On the Foundation of Control

Let us now revise the classification of companies on the foundation of control i.e., who
effectively control the affairs of the company. On this foundation the companies may be
grouped as following:
Government company: According to Section 617 of the Act a
government company means "any company in which not less than fifty
one per cent of the paid-up share capital is held through the Central
Government or through any State Government or Governments or
partly through the Central Government and partly through one or more
State Governments and comprises a company which is a subsidiary of
a government company as therefore defined". Indian Telephone
Industry, Hindustan Aeronautics Ltd. is examples of government
companies. Even a subsidiary company of a government company is
regarded as a Government Company. A government company
registered under this Act is a non-statutory company and is not an
agent of the government. Further, like any other company, it is
governed through the provisions of the Companies Act. Section 620 of
the Act, though, gives that the Central Government may through
notification in the official Gazette direct that any of the provisions of
this Act specified in the notification
Shall not apply to any government company, or
Shall apply to any Government company, only with such exceptions,
modifications, and adaptations, as may be specified in the notification.
A copy of such notification shall be laid before the Parliament.
Sections 618,619 and 619(A) of the Act cannot be exempted as these
Sections specially deal with Government companies.
A company which may not be termed as a government company as
defined in Section 617 is regarded as a non-government company.
Foreign company: A foreign company means a company which is
incorporated in a country outside India under the law of that country
but has recognized a lay of business in India. A company incorporated
outside India may carry on business in India even 'without establishing
a business e.g., through agents. After the establishment of business in
India, the following document necessity be filed with the Registrar of
companies within thirty days from the date of establishment:
A certified copy of the charter or statutes under which the company is
incorporated, or the memorandum and articles of the company
translated into English,
The full address of the registered office of the company,
A list of directors and secretary of the company,
The names and address of any person resident in India who is
authorized to accept, on behalf of the company, service of legal
procedure and any notice served on the company; and
The full address of the company's principal lay of business in India. A
foreign company is obliged to state the name of the country in which
the Nature and Types of company is incorporated in every
prospectus inviting subscription in India for its Companies shares or
debentures. The company will also conspicuously exhibit on the
outside of every office or lay, where it carries on business in India, the
name of the company, and the country in which it is incorporated in
legible English and secondly in a language in common use in the
locality in which the office or lay is situated. The name, of the
company and of the country where the company has been incorporated
should also be staled in legible English; all business letters, bill heads,
letter paper, all notices and other official publications of the company.
A company which cannot be termed as foreign company under the
provisions of the Companies Act should be regarded as a domestic
company. A foreign company is required to stay at their principal lay
of business in India the books of accounts with respect to money
received and expended, sales and purchases made and assets and
liabilities of their business in India. Provisions of Section 159 of the
Ace relating to the filing of the annual return with the Registrar of
companies are also applicable to a foreign company.
Holding and Subsidiary company: Usually speaking, if one company
controls another company, the controlling company may be termed as
the 'Holding company‟ and the company so controlled may be termed
as a „subsidiary company'. Section 4(4) of the Act defines a holding
company as "a company shall be deemed to be the holding company of
 another, if that other is its subsidiary". A company (Bet us call it
Company S) is deemed to be a subsidiary of another company (let us
call it Company HI) only in the following cases:
When the company (Company H) controls the composition of Board of
Directors of other Company (Company S),
When the Company H holds more than half of the equity share capital
of Company S in conditions of nominal value. You necessity
understand that a majority shareholding of this sort would mean that
the Company H controls more than half of the total voting power in
Company S. When Company S is a subsidiary of a Company T, which
in turn is the subsidiary of Company H. In any of the above cases and
only in these oases, would the Company S be deemed a subsidiary of
Company H,

A holding company is usually a very major shareholder of its subsidiary and both
continue to enjoy separate legal entities in the eyes of law. Unless there is a specific contract
flanked by the two companies, one cannot be said to be the agent of another. A subsidiary
company also cannot be said to be a part of the holding company.

ASSOCIATION NOT FOR PROFIT

You learnt that limited companies are required to use the word 'limited' as the last word of
their name. There is though, one exception which is provided through Section 25.

This section gives that the Central Government may through license grant that an
association may be registered as a company with limited liability, without by the words
'limited' or 'private limited‟ as part of its name. The license will be granted only in the case of
'association not for profit'. In other words the Central Government will grant the license only
if it is satisfied that:
The association in relation to the to be shaped as a limited company
aims at the promotion of commerce, art, science, religion, charity or
any other useful substance;
It intends to apply its profits, if any, for promoting its objects; and
It prohibits the payment of dividend to its members.

Such companies may ha public or private companies and May or may not have share
capital, The Central Government may impose any conditions and circumstances that it deems
fit for the grant of the license which shall be binding on the association. The Government
Company and its Formation can at any time, after giving notice of its intention,
revoke the license given to the association, It would, though, allow the association to present
its case against revocation of the license.

ILLEGAL ASSOCIATIONS

Meaning

The law desires to prevent the mischief arising from big trading undertakings being
accepted on as unregistered bodies because if business is accepted on through such bodies, the
persons dealing with such trading undertakings would not know with whom they are
contracting. Due to this ignorance they might be put to great hardship. Section 11 of the
Companies Act aims at repressing this public mischief. It gives that no company, association
or partnership consisting of more than ten persons for the purpose of carrying on the business
of banking and more than twenty persons for the purpose of carrying on any other business
shall be shaped unless it is registered as a company under this Act, or is shaped in pursuance
of some other Indian law.

It is, therefore, clear from the account that if an association is shaped for carrying on
banking business, the maximum number of its members should not exceed ten. If the number
of individual forming such association exceeds ten, the association necessity be registered
under the Companies Act or should be shaped in pursuance of some other Indian laws.
Likewise, any association shaped for the purpose of carrying on any other business for profit
and consisting of more than twenty persons in order to be a legal association, should be
registered. If it is not registered, the association will be regarded as an 'illegal association' even
if none of the objects for which the association has been shaped is illegal.

Now imagine the situation where an unregistered association is shaped for carrying on the
business of banking with nine members. Subsequently, two more persons join the association
as members. What will be the effect of their joining the association? Your answer would be
that the association would become an illegal association from the moment the number of
members exceed ten. For the purpose of computing the number of persons, each individual
forming the association or partnership shall be counted as one. When we say person, we mean
an individual and not bodies of individuals. Now suppose an association is shaped flanked by
three partnership firms A, B, and C. Firms A and B have four partners each and firm C has
three partners. Will the association fall within the purview of Section 11 and require
registration? Yes, the association would require registration because the total number of
members has exceeded ten.
 From the account you may conclude that the limit on maximum number of members is
applicable only if the association is to carry on business for profit. This restriction is not
applicable if the association is shaped for non-commercial purposes such as associations
shaped for promoting religion, science, art, or charity etc.

Exceptions

Section 11 does not apply in the following cases:

Joint Hindu Family: A joint Hindu family may carry on any business,
even for earning profits and with any number of members without
being registered in pursuance of any Indian Law as required through
Sec, 11 of the Companies Act, 1956 and yet it will not be an illegal
association. But, where two joint Hindu families join hands to carry on
business, the provisions of Section 11 became applicable. Though, for
computing the number of members of such an association, the minor
members of such families shall not be incorporated.
Stock swap: A stock swap is not sheltered through Section 11 as it is
not shaped for the purpose of carrying on any business.
Non-profit earning associations: All religious, charitable, literary,
social, sports and other associations whose substance is not to create
profit are also not sheltered through Section 11.

Consequences

The consequences of an illegal association are as follows:

Every member shall be personally liable for all liabilities incurred in
such business.
An illegal association cannot sue to recover any of its debts or any
other property. Likewise, no suit can be filed against an illegal
association to recover money lent to it. Though, a suit can be filed
against every member of an illegal association. A suit cannot be filed
even if the association is subsequently registered as a company.
 Every person who is a member of such an association shall be
punishable with fine which may extend to one thousand rupees.
An illegal association cannot be wound up under the Companies Act.
No suit can be filed through any member for partition, dissolution or
for taking account of an illegal association.
Since an illegal association has no legal subsistence, it cannot enter
into a contract.
The illegality of an illegal association cannot be cured through
subsequent reduction in the number of its members.

REVIEW QUESTIONS
"Company is an artificial person created through law with a perpetual
succession and is dissimilar from the personality of the member
constituting it'. Comment.
Talk about the concept of corporate veil. Under what circumstances
can this veil are lifted?
Distinguish flanked by a company and a partnership.
Describe the features of a company.
Talk about the circumstances in which lifting of corporate veil is
justified
 CHAPTER 2

Public and Private Companies

STRUCTURE
Learning objectives
Meaning of a private limited company
Meaning of public limited company
Distinction flanked by a private company and a public company
Privileges of a private limited company
Exemptions accessible to an self-governing private company
Restrictions on a private company
Conversion of a private company into a public company
Conversion of a public company into a private company
Review questions

LEARNING OBJECTIVES
After learning this chapter, you should be able to:
Describe a private and a public limited company,
Distinguish flanked by private and public companies,
Describe the privileges' enjoyed through a private limited company,
Explain the restrictions imposed on a private, company,
Describe how a private company is converted into a public company
and vice versa, and
Explain the circumstances under which a private company is deemed
to be a public company.

MEANING OF A PRIVATE LIMITED COMPANY

 Under Section 3(1) (iii) of the Companies Act of 1956, a private limited company has
been defined as a company which, through its Articles of Association (a) restricts the right
to transfer its share if any, (b) limits the number of its members to fifty, and (c)
prohibits any invitations to the public to subscribe for any shares in, or debentures of, the
company.
Let us now talk about the implications of each of these restrictions.
Restriction on the right of members to transfer their shares: The
articles of association of a private company necessity specifically have
a provision restricting the right of the members to transfer their shares,
if any. It means that the shares of a private company are not as freely
transferable as those of the public companies. But it does not mean that
the shares of a private company cannot be transferred at all, The
articles usually give that whenever a member of a private company
desires to transfer his shares, he necessity offer them to the existing
members at a price to be determined through the directors. This
restriction is placed so as to preserve the family nature of 'the
company's members. That is why a private company is sometimes
described a 'closed corporation. The Act, though, does not specify the
manner in which this restriction is to be imposed. You should note that
a private company having no share capital need not contain this
restriction in its articles.
Restriction on maximum number of members: A private limited
company is also required to limit the maximum number of its members
to fifty. It means that the number of members in a private company can
be flanked by two and fifty, two being the statutory minimum required
for the formation of a private company. While counting the members
the following are not to be incorporated:
Persons who are in the employment of the company and through virtue
of their employment happen to be members of the company, and
Persons, who, having been in the employment of the company, were
members of the company while in that employment and have sustained
to be members after the employment ceased. It is also provided that
where two or more persons hold one or more shares of the company
 jointly; they shall be treated as a single member for the purpose of
counting the number.
Prohibition on invitation to public: This restriction implies that a
private limited company necessity not issue a prospectus or any other
public invitation, directly or indirectly to the common public so as to
invite them to invest in its shares or debentures. The question arises as
to how one would ascertain whether an invitation made through the
company is in the nature of public invitation or not. The public may
contain any section of the public whether selected as members or the
debenture holders of the company or as customers of the person
issuing the prospectus, or in any other manner. The invitation cannot
be treated as one made to the public when it can, under all
circumstances, be properly regarded as a domestic or private concern
of the persons creation the invitation and those getting it.

In easy words, it means that a private company cannot issue any invitation to the public. It
has to create its own private arrangement to raise its capital or loan.

You should note that since the mentioned three restrictions necessity be contained in the
articles of a private limited company, it is necessary for a private company to frame its own
articles. In case a private company is a limited company, then it necessity add the words
'Private Limited‟ at the end of its name. A private company may be a company limited
through shares or (b) a company limited through guarantee, or (c) an unlimited company. If a
private company does not comply with any of the restrictions contained in the articles, it
ceases to enjoy some of the privileges granted to a private company.

MEANING OF PUBLIC LIMITED COMPANY

According to Section 3(1) (IV) of the Companies Act, a public limited company means a
company which is not a private company. Therefore, it can be said that a public company is
one, the articles of which do not contain these restrictions. In other words, a public company is
one which does not impose any restrictions on the right of the members to transfer their
shares, does not restrict the maximum number of members, and which can invite common
public to subscribe for its shares. Therefore, any member of the public can acquire shares or
debentures of a public company. The shares of a public company can be traded on a stock
swap. It should be noted that the minimum number of members in a public company necessity
be seven.
 A public company, like a private company, can also be (a) a company limited through
shares, or (b) a company limited through guarantee, or (c) an unlimited company.

DISTINCTION FLANKED BY A PRIVATE COMPANY AND A

PUBLIC COMPANY
Having learnt the meaning of a private company and a public company, you should now
be able to distinguish flanked by the two. The following are the main points of variation
flanked by a private company and a public company:
Minimum number: For the formation of a public company you require
at least seven members, while the minimum number of members
required for forming a private company is only two.
Maximum number: In the case of a public company there is no
restriction on the maximum number of members, but in the case of a
private company the maximum number necessity not exceed fifty.
Name: The name of a public company limited through shares of
guarantee necessity end with the word 'Limited' whereas the name of a
private company limited through shares or guarantee necessity end
with the words 'Private limited'.
Transferability of shares: The shares of a public company are freely
transferable, whereas in a private company the right to transfer the
shares is restricted through the articles of association.
Invitation to the public: A public company, after issuing a prospectus
or a statement in lieu of prospectus, invites the common public to
subscribe for its shares or debentures. But a private company cannot
invite public to subscribe for its shares or debentures, as its articles
prohibit any such invitation to the public.
Commencement of business: A private company can commence its
business soon after obtaining the certificate of incorporation, but a
public company can commence business only after obtaining the
certificate of incorporation as well as the certificate to commence
business.
Documents: The memorandum of association and articles of
association of a public company should be signed through seven
members, while in case of a private company; they are required to be
signed through two members. If a public company chooses not to
prepare its own articles of association and instead chooses to adopt
'Table A' of the Companies Act as its articles of association, it can do
so, but, a private company has to compulsorily frame its own articles
of association because it is through this document alone that the
company spaces some statutory restrictions,
Allotment of Shares: No public company can allot shares until the
amount of minimum subscription has been received through the
company. No such restriction is applicable in case of a private
company. A private company can allot shares immediately after
incorporation.
Share Warrant: A public company can issue bearer share warrants.
But a private company cannot issue share warrants.
Statutory meeting: A public company necessity holds a statutory
meeting and files a statutory statement with the Registrar of
companies. A private company is neither required to hold the statutory
meeting nor file a statutory statement with the Registrar.
Directors: A public company necessity has at least three directors
whereas a private company necessity has at least two directors. The
director of a public company necessity files with the Registrar a
written consent to act as a director. He is also required to sign the
memorandum and enter into a contract for their qualification shares,
while the directors of a private company need not do any such thing.
Two thirds of the total number of directors of a public company
necessity retires through rotation, while the directors of a private
company are not liable to retire through rotation, they may be
appointed as permanent life directors. In case of a public company, no
loan can be given to its directors without the approval of the Central
Government, but directors of a private company can borrow from their
company without the approval of the Central Government. Any
director of a public company, if he has any interest in the subject
matter which is being discussed in a meeting, cannot participate in the
 Board's proceedings nor can be vote on that issue. But in case of a
private company, the interested director can participate in the meeting.
He is also entitled to cast his vote.
Special privileges: A private company enjoys some special privileges,
but a public company enjoys no such privileges.
Quorum: In the case of a public company, there necessity is at least
five members personally present for holding the company meeting, but
in a private company, this number is two.
Managerial remurteration: In case of a public company total
managerial remuneration cannot exceed eleven per cent of the net
profits. This restriction is not applicable to a private company.

PRIVILEGES OF A PRIVATE LIMITED COMPANY

You know that in a public company a big amount of public money is invested. So, there is
greater need to protect their interests through framing strict rules. But in a private company,
the membership is usually restricted to the promoters, their friends, and relatives. It raises its
capital privately from a limited number of members. The members of the public are not
considerably interested in such companies. So, several of the provisions of the Companies Act
are not applicable to a private company. Therefore, a private company is granted a number of
exemptions or privileges. These are as follows:

Number of members: A private company can be shaped with only two

members.
Commencement of business: A private company can start its business
immediately after its incorporation.
Minimum subscription: A private company can allot shares without
waiting for the minimum subscription to be received.
Prospectus: A private company need not issue a prospectus or file with
the Registrar of companies a statement in lieu of prospectus before
allotment of its shares.
Assistance for purchase of shares: A private company can help its
prospective member or members financially for the purchase of its own
shares.
 Subsequent issue of shares: A private company is not required to offer
further shares first to the existing shareholders i.e., it can issue further
shares even to the outsiders.
Statutory meeting and statement: A private company need not hold a
statutory meeting or file a statutory statement with the Registrar of
companies.
Provisions concerning directors: A private company may have a
minimum of two directors. They need not file their consent to act as
such with the registrar. They need not hold qualifying shares.
Quorum: Only two members who are personally present at the
common meeting of shareholders shall form the quorum, unless
otherwise provided in the articles.
Demand for Poll: If a resolution is being discussed in a meeting and
the number of members are seven or less than seven a poll may be
demanded through only one member. If more than seven members are
present, such a poll may be demanded through only two members.
Managerial remuneration: The restriction on the managerial
remuneration i.e. per cent of net profit is not applicable to a private
company.

EXEMPTIONS ACCESSIBLE TO AN SELF-GOVERNING

PRIVATE COMPANY
The several privileges are accessible to every private company whether it is a subsidiary
of a public company or a private company 'deemed to be a public company‟. But such
companies do not enjoy several of the privileges which are enjoyed through an self-governing
private company. An self-governing private company has the following additional privileges.
Type of Shares: An self-governing private company can issue any
class of shares in such shapes and with such voting rights as it deems
appropriate. Even shares with disproportionate voting rights can be
issued.
Common meetings: A private company, if it so desires, can exclude
the provisions of Companies Act in respect of common meetings.
Through its articles, it can formulate its own provisions to regulate its
common meetings. These provisions may relate to the notice of the
meetings, quorum, chairman, proxy, voting and demand for poll. ,
Exemption concerning managerial remuneration: The restrictions
imposed through the Companies Act concerning the remuneration of
directors are not applicable to an self-governing private company. It is
also not necessary for such companies to obtain sanction of the Central
Government to augment the remuneration of directors. .
Appointment of a firm or body corporate to any office of profit: The
restrictions concerning the appointment of a firm or a body corporate
to a lay of profit under the company do not apply to an self-governing
private company.
Augment in the number of directors: A public company and a private
company which is subsidiary of a public company is required to obtain
the approval of the Central Government before rising the number of its
directors beyond the maximum number mentioned in the articles. No
such approval is required in case of an self-governing private
company.
Filling of casual vacancies: The regulations in respect of filling the
casual vacancies in the Board of Directors do not apply to an self-
governing private company.
Disqualification of directors: The self-governing private company
may, through its articles, give special grounds for disqualifications for
appointment of directors.
Qualification shares: Directors of public companies and private
companies which are subsidiaries of a public company are required to
obtain their qualification shares within six months of their appointment
to the office of the director. This provision as well as the one relating
to the maximum amount (Rs. 5,000) of qualification shares does not
apply in case of an self-governing private company.
Number of companies: A person can be the director of any number of
self-governing private companies. The provisions of the Act limiting
the number of companies to be supervised through a director to twenty,
do not apply to it.
 Restrictions on loans: The provisions of the Act laying down
restrictions on loans or guaranteeing the loans or providing security for
loan to any of its director, do not apply to an self-governing private
company.
Inter company loans: An self-governing private company can lend
money to other companies under the similar management.
Intercorporate purchase of shares: The provisions prohibiting the
purchases of shares arid debentures of other companies in the similar
group do not apply to such a company.
Power of Central Government in respect of Board of Directors:
Under the Company Law, the Central Government has been given the
power to prevent any changes in the Board of directors, which may
prejudicially affect the interests of the company. Self-governing
private companies are exempt from such provisions.

You should though, note that the above privileges and exemptions can be enjoyed through
an self-governing private company as extensive as it remnants as such. The moment a private
company fails to comply with any of the three restrictions contained in its articles or it
becomes a subsidiary to a public company, it shall lose these special privileges.

RESTRICTIONS ON A PRIVATE COMPANY

Along with the privileges accessible to a private company, some restrictions have also
been placed. You have learnt in relation to the three restriction placed on a private company
through its articles viz., (a) restriction on the right to transfer shares, restriction on the
maximum number of the members exceeding fifty, and prohibition on invitation to the public
for investment in its shares or debentures. Besides these, a private company is also subject to
the following restrictions:
A private company cannot issue share warrants payable to bearer.
Under Section 159 private companies are required to send an annual
list of their members and a summary of sure particulars to the Registrar
of companies. A private company is also required to send with this
return, a certificate, certifying that the company has not, since the last
return, made any public invitation inviting the public to subscribe for
its shares or debentures. It is also required to certify that where the
annual return shows the number of members of the company exceeds
 fifty; the excess consists of those persons who are not to be
incorporated in counting the number of fifty.
A private company is an annually required to certify to the Registrar
that since the last annual common meeting, (a) no body corporate has
held twenty-five per cent or more of its paid up share capital, (b) the
company itself did not hold twenty-five per cent or more of paid up
capital of one or more public companies, (c) its average annual
turnover throughout the preceding three years did not exceed ten crores
rupees, and (d) the company did not accept or renew deposits from the
public.
The member of a private company is not allowed to appoint more than
one proxy to attend and vote at a meeting of the company.

CONVERSION OF A PRIVATE COMPANY INTO A PUBLIC

COMPANY
A registered company may choose to be a public or a private company depending upon
the restrictions it wants to lay upon itself or the privileges it wants to enjoy. A private
company, after incorporation, may get itself converted into a public company either through
its own choice or through a default in meeting the provisions of Section 3 (i) (iii).

In addition, there are sure circumstances under which a private company, inspite of
following all the restrictions mentioned in Section 3(1) (iii) is deemed to be a public company
through operation of law. Let us now talk about the ways in which a private company, through
choice or through default, gets converted into a public company.

Conversion through Choice

A private company may itself choose to become a public company. The procedure for
conversion is laid down in Section 44 of the Indian Companies Act. It is as follows:
The company necessity calls a meeting of its Board of Directors to
consider and approve the proposal to convert the company into a
public company.
In accordance with the decision of the Board, the company necessity
convenes a common meeting at which the company necessity passes a
special resolution altering its articles of association. The articles
necessity is altered in such a method that they no longer contain the
restrictions of Section 3(1) (iii); as well as all the provisions which
may be inconsistent with the necessities of a public company. The
name of the company would also be altered through deleting the word
'private' from the name of the company.
Within thirty days of the common meeting at which the special
resolution is passed, the company necessity files the following
documents with the Registrar of companies.
A copy of the special resolution concerning alteration of the articles,
A copy of the altered articles, and
A copy of the prospectus containing the information required in
accordance with Part I and II of Schedule II of the Companies Act or a
statement in lieu of prospectus in the prescribed form.
 If the number of members in the private company is less than seven,
the company necessity augments the number of members to seven.
Likewise the number of director‟s necessity is increased to at least
three.
After filing the copy of resolution and the prospectus or statement in
lieu of prospers the company necessity applies to the Registrar for a
fresh certificate of incorporation. The company usually enters into
fresh agreements with its managerial personnel presently before
conversion.

The company becomes a public company from the date on which the special resolution is
passed. Though, the change in its name becomes effective only on the issue of fresh certificate
of incorporation. Your necessity note that on such conversion no new company comes into
subsistence. This conversion does not affect the legal personality of the company which
continues to remain the similar. Such conversion does not, in any method, extinguishes the
liability of the company i.e., its liability remnants the similar as it was before conversion.

Conversion through Default

You have learnt that a private company is one which spaces sure restrictions on itself
through its articles of association. If it creates a default in complying with the provisions of
Sec. 3(1) (iii), then it ceases to be a private company and is treated as a public company. Then
the special privileges are not accessible to the company. All the provisions of a public
company shall become applicable to it as if it was a public company. It necessity though, be
remembered that the court has been given the power to grant relief in cases where it is
satisfied that the default in respect of the provisions of Section 3(1) (iii) was purely accidental
and not intentional.

Deemed to be Public Company

Under the Indian Companies Act 1956, the private companies enjoy sure privileges
primarily on the ground that they are closely held corporate bodies where funds of a limited
number of persons are involved. Since public money is not involved, the law does not give for
as stringent a scrutiny of the affairs of a private company as it does in the case of a public
company where public money is directly involved.
 It may, though, happen that, in excess of a era of time, private companies may, through
their enterprise and investments, engage in extensive business and may actually be in a
location to control several public companies. At times, other private and public companies
may invest their funds in such a private company. In an indirect method, so, public money
gets invested in the private companies. There is no cause why such companies should still be
allowed the privileges given to private companies.

The Companies Act has provided for such contingencies through creation specific
provisions. These provisions are mainly contained in Section 43-A of the Act. Section 43-A
gives that if a private company operates on a big level or in some method takes advantage of
or utilizes public money, it will be deemed to be a public company. All the provisions of the
Act applicable to a public company shall then become applicable to such a private company.
Though, if such a company wants, it may continue with the three restriction of Section 3(1)
(iii) in its articles and the number of its members may continue to be less than seven.

The circumstarices described in Section 43-A under which a private company is deemed
to be a public company are:
When twenty-five per cent or more of its paid up share capital is held
through one or more bodies corporate, a private company shall
automatically became a public company on and from the date on which
the percentage mentioned above is so held. While calculating the
percentage of paid up share capital, the shares held through a bank in
the capability of a trustee or executor of a deceased member will not be
counted. According to the explanation given under Section 43-A the
term "bodies corporate" means public companies, or private companies
which have become public companies through virtue of this section.
Where the average annual turnover of a private company is rupees ten
crores or more throughout the era of three consecutive financial years,
the company will be deemed to be a public company on the expiry of a
era of three months from the last day of the third financial year
throughout which the company had attained the average annual
turnover of the said amount. The term turnover here has been defined
as "the aggregate value of realization made from the supply of sharing
of goods or on account of services rendered, or both, through the
company throughout a financial year”.
 Where a private company holds twenty-five per cent or more of the
paid up share capital of a public company, it will become a public
company on, and from the date, on which the above mentioned
percentage was first held through the private company.
Where a private company invites, accepts, or renews deposits from the
public, other than from its members, directors, or relatives, it shall
become a public company. Through the inclusion of a new sub-section
(1-C) from 1988, Section 43-A gives that if a private company, after an
invitation is made through an advertisement, accepts or renews
deposits from the public, such private company shall become a public
company from the date on which such an acceptance or renewal is first
made. After that date all the provisions of Section 43-A shall apply to
such a deemed public company.

A private company which becomes a public company under any of the above
circumstances through virtue of Section 43-A is termed as a 'deemed public company'. Again
such a company may carry on with presently two directors and less than seven members. A
deemed public company shall continue to be a public company, till it has, with the approval of
the Central Government and in accordance with the provisions of the Act, again become a
private company. Section 43-A further gives that every private company which becomes a
deemed public company under this section will inform the Registrar within three months of
such conversion that it has become a public company. On being so informed, the Registrar
will delete the word 'private' from the name of the company in the register of companies. He
will also create necessary alterations in the certificate of incorporation and the memorandum
of association of the company. If a company fails to comply with this provision, the company
and every officer of the company who is guilty of default shall be punishable with a fine
extending upto rupees five hundred for every day of default.

To sum up, we may say that Section 43-A makes a special kind of public company (a
deemed public company). The special characteristics of such a public company are that the
number of its members may be below seven and its articles may continue to have the
restrictions of Section 3(1) (iii) which pertains to a private company. The Central Government
if it so directs, may exempt the profit and loss account of such company filed with the
Registrar from being open to public inspection. Like any other private company, the deemed
public company may have only two directors. Further, unless a deemed company raises
subscription from the public, the requirement of tiling a statement in lieu of prospectus with
the Registrar, does not apply. In all other compliments a deemed public company is treated as
a public company.

CONVERSION OF A PUBLIC COMPANY INTO A PRIVATE

COMPANY
You have learnt that under sure circumstances a private company gets converted into a
public company. Likewise, a public company may also be converted into a private company.
While the law does not lay down a specific procedure for the conversion of a public company
into a private company, it does not prohibit such a conversion. A public company through
altering its articles in such a manner that the three restrictions mentioned in Section 3(1) (iii)
are incorporated may get itself converted into a private company. Such an alteration may be
effected through passing a special resolution in the common meaning of the company. Such a
resolution would also be needed to alter the name of the company. Likewise, some alterations
would also be necessary in the articles of association to create them relevant to a private
company.

Section 31 of the Act specifically gives that any alteration made in the articles which has
the effect of converting a public company into a private company, shall be effective only when
it is approved through the Central Government. When the special resolution in respect of the
alteration has been approved through the Central Government, a printed copy of the articles,
as altered should be filed with the Registrar within one month of the receipt of the order of
approval.

After such a conversion of a public company into a private company, it will have to
reduce the number of its members and add the word 'Private' at the end of its name. After it is
duly converted into a private company, it shall enjoy all the privileges of a private company.

REVIEW QUESTIONS
Describe a private company. Distinguish flanked by a private company
and a public company.
Talk about several privileges enjoyed through a private company. Why
does law grant these privileges to a private company?
Enumerate the several restrictions imposed through law on a private
company.
Describe the procedure for converting a private company into a public
company.
Describe a public company. Describe the procedure for converting a
public company into a private company.
 CHAPTER 3

Promoters
STRUCTURE
Learning objectives
Promoter : meaning and importance
Functions of a promoter
Legal location of promoters
Duties of promoters
Liabilities of promoters
Remuneration of promoters
Location of preliminary contracts
Review questions

LEARNING OBJECTIVES
After learning this chapter, you should be able to:
Explain the meaning and importance of promoters,
Describe the functions of a promoter,
Enumerate duties and liabilities of a promoter,
Describe remuneration payable to promoters, and
Explain the location of preliminary contracts.

PROMOTER: MEANING AND IMPORTANCE

You learnt that a company is an artificial person created through law. A company is born
only when it is duly incorporated. For incorporating a company several documents are to be
prepared and other formalities are to be complied with. All this work is done through
promoters. Gerstenberg has defined promotion as the detection of business opportunities and
the subsequent, organisation of funds, property and managerial skill into a business concern
for the purpose of creation profits there from. After the thought is conceived, the promoters
create detailed investigations to discover out the weaknesses and strong points of the thought,
determine the amount of capital required, and estimate the operating expenses and probable
income. On being satisfied in relation to the economic viability of the thought, the promoters
take all the necessary steps for incorporating the company.

The Companies Act does not describe the term promoters anywhere; it only refers to the
liabilities of the promoters. A number of judicial decisions have defined the term promoter.
According to L.J, Bowen, the term promoter is a term not of law but of business, usefully
summing up in a single word a number of business operations well-known to the commercial
word through which a company is usually brought into subsistence.

Another definition given through Lord Blackburn states that”the term promoter is a short
and convenient method of designating those who set in motion the machinery through which
the Act enables them to make an incorporated company".

Justice C. Cockburn described a promrer as "one who undertakes to form a company with
reference to a given project and to set it going, and who takes the necessary steps to
accomplish that purpose."

A company may have more than one promoter. The promoter maybe an individual, firm,
an association of persons, or a body corporate. Even if a person has taken a very minor part in
the promotion behaviors, he may still be a promoter. But a person cannot be held as promoter
merely because he has signed at the foot of the memorandum or that he has provided money
for the payment of formation expenses.

It is, though, significant for you to keep in mind that everyone who is associated with the
procedure of the formation of a company cannot be described a promoter. For instance, a
solicitor who draws up the documents of the proposed company in his professional capability
is not a promoter in the eyes of law. Likewise, an engineer who advises on the selection of
location or a valuer who helps with drawing the estimates would not be regarded a promoter.
Section 62 (6) creates it clear that persons assisting the promoters through acting in a
professional capability e.g., solicitors, accountants and other experts are not promoters.

It should be clear to you that a promoter is one who performs the preliminary duties
necessary to bring a company into subsistence. Therefore, the true test to describe a person as
a promoter lies in finding out whether he is keen to form a company and take steps to provide
it a concrete form.

The promoters, in information, render very useful services in the formation of a company.
They render a very useful service to society and they play an significant role in the ' industrial
development of countries. A promoter has been described as 'a creator of wealth' and 'an
economic prophet'. The promoters carry considerable risk because if the thought sometimes
goes wrong then the time and money spent through them will be a waste.

FUNCTIONS OF A PROMOTER
You learnt that a promoter plays a very significant role in the formation of a company;
you have also noted that a promoter may be an individual, an association, or a company, in
their capability of promoters; they perform the following functions in order to incorporate a
company and to set it going.
To originate the scheme for formation of the company: Promoters are
usually the first persons who conceive the thought of business. They
carry out the necessary investigation to discover out whether the
formation of a company is possible and profitable. Thereafter, they
organize the possessions to convert the thought into a reality through
forming a company. In this sense, the promoters are the originators of
the plan for the formation of a company.
To secure the cooperation of the required number of persons willing
to associate themselves with the project : The promoters, in
accordance with whether they want to incorporate a private pr a public
company, attempt to secure the co-operation of persons needed to form
the company. You learnt that the minimum number of members
requited to form a public company is seven and that for a private
company the minimum number is two. Depending upon the farm
chosen, the promoters may decide upon the number of primary
members.
To settle in relation to the name of the company: The promoters have
to seek the permission of the Registrar of companies for selecting the
name of the company. The promoters usually provide three names in
order of preference. The promoters should ensure that the name of the
company should not be identical with or should not too closely
resemble the name of another existing company.
To get the documents of the proposed company prepared: As the
company itself does not exist before incorporation, this work of
preparation of these documents has to be undertaken through the
promoters. The promoters, on the advice of legal experts get the
Memorandum and Articles of Association prepared and arrange for
their printing. In case the proposed company is a public limited
company, intending to issue shares on incorporation, the promoter‟s
necessity also arrange to get the prospectus prepared and printed.
 To appoint bankers, brokers, and legal advisers for the company: The
incorporation of a company involves a lot of legal formalities. The
promoters may need to consult the legal experts on many of these
matters. They, so, appoint solicitors to assist them in the procedure of
formation of the company. The company is shaped for the purposes of
carrying on business and as such deals with funds and their
management. The promoters necessity, so, also appoint bankers for the
company who will receive share application moneys. If the proposed
company is a public limited company, the promoters necessity also
ensure the success of the first capital issue made through the company
through appointing underwriters and brokers.
To settle preliminary agreements for acquisition of assets: The
promoters may be required to acquire a appropriate location for the
factory, create arrangements for plant and machinery, and may even
create tentative arrangements for key personnel. Sometimes in order to
run the business the company may be required to take in excess of
property of a running business. Promoters fulfill the function of seeing
that such property and business is acquired through the proposed
company on justifiable conditions.
To enter into preliminary contracts with the vendors: In respect of all
the properties and assets, the promoters would need to settle the
conditions of contracts with the third parties from whom these
properties are to be bought. These contracts are described preliminary
contracts.
To arrange for filing of the necessary documents with the Registrar:
The promoters are required to pay the stamp duty, filing fee and other
charges for registration of the company. The promoters are to see that
the several legal formalities for incorporating the company are
complied with.

LEGAL LOCATION OF PROMOTERS

You learnt that promoters are responsible for the formation of a company. As such, they
inhabit significant location, and have very wide powers relating to the formation of the
company. It will, though, be motivating to note that there are no specific statutory provisions
in this regard.

The legal location of a promotes is somewhat peculiar. The promoter‟s legal location is
that he is neither an agent nor a trustee of the company he promotes; He is not an agent
because there is no principal in subsistence. You will recall from your exposure to the contract
of agency that in order to be a valid contract of agency both the principal and the agent
necessity be in subsistence. For the similar cause, he also cannot be described the trustee of
the company.

Though, it does hot mean that the promoters do not have any legal connection with the
proposed company. The legal location of a promoter can be correctly described through saying
that he stands in a fiduciary location (connection of trust and confidence) in relation to the
company he promotes,

Lord Cairns has rightly stated the location of promoter in Erlanger V. New Sam brers
Phosphate Co. "The promoters of a company stand undoubtedly in a fiduciary location. They
have in their hands the creation and molding of the company. They have the power of defining
bow and when and in what form, and under whose supervision, It shall come into subsistence
and begin to act as a trading corporation," In information, the promoters inhabit a fiduciary
location in regard to the company they promote, and also the original allottees whom they
induces to buy shares of the company.

You would recall from what you have studied in the contract of agency and partnership
that a fiduciary connection means a connection of utmost trust and confidence and implies
disclosure of all material facts. Being in a fiduciary location, the promoter necessity not
create, either directly or indirectly, any profits at the expense of the company that he
promotes, without the knowledge and consent of the company.

DUTIES OF PROMOTERS
In the section you have presently learnt that the promoter occupies a location of total
confidence and trust in relation to the company promoted through him. The promoter in this
fiduciary capability has the following significant duties.
Not to create any secret profit: A promoter cannot create any direct or
indirect profits out of the promotion of the company, since he occupies
a location of a trust, it is his duty to be honest and uphold the trust of
his location. You necessity clearly understand that the law does not
forbid the promoter from creation a profit. The law prohibits only the
creation of secret profits i.e., the profits which the promoter has not
disclosed to the company. The promoters of a company are perfectly
free to create a profit provided they disclose information to an self-
governing Board of directors. If there is no self-governing Board of
Directors, then he necessity disclose the profits to the planned
shareholders.
Recording the contract — The Company may on learning of the secret
profit, rescind the contract entered into through the promoter to create
the said profit.
Order for refund — The Company may require the promoter to refund
the amount of secret profit.
Suit for breach of duty — The Company may sue the promoter for
misfeasance, as the promoter, through creation the secret profit, has
defaulted in his duty towards the company.
To create full disclosure to the company of all relevant facts: In
keeping with his fiduciary capability, a promoter is bound to disclose
to the company all relevant facts including any profit made from the
sale of his own property to the company and his personal interest in a
transaction with the company. You should bear in mind that while
creation a disclosure the promoter necessity create the full and
complete disclosure. If he contracts to sell his own property to the
company without creation a full disclosure, the company may either
repudiate the contract or affirm the contract and recover the profits
made through the promoter. Let us explain these fiduciary duties of the
promoter with the help of an instance. He was the owner of some arid
land. He and some of his friends, decided to form a company to
manufacture microchips. They appointed the first directors of the
company and 'A' sold his own land to the company at a price higher
than the actual valuation of the land. When the company was shaped,
the purchase agreement of land was approved at the meeting of the
shareholders but the information of A's ownership and the profit made
through him were not disclosed at the meeting. Subsequently when the
company went into liquidation, the liquidator filed a suit against A' to
recover the profits made through him in the sale of land. You would
 observe that in this case A' had defaulted in his duty to create full
disclosure of all material facts and had made a secret profit out of
promotion. As there was no disclosure through the promoters of the
profits they were creation the company is entitled to rescind the
contract. A' could have retained the profits trade through him if he had
made a full disclosure to the directors of the company or to the
shareholders of the company, all the relevant facts of the transaction
including his personal interest and the profits made.
To provide the benefit of negotiations to the company: The promoter
necessity pass on to the company, the benefit of any negotiation or
agreement that he has accepted on in his capability of a promoter. For
instance, when he has negotiated a sure price for some land for the
company, he necessity sell the property to the company at the
negotiated price. If he charges a price higher than the negotiated price,
the company may rescind the contract on discovering the truth of the
matter. If, due to some cause, the contract could not be rescinded, the
company is entitled to claim damages from the promoters and the
amount of damages shall be equal to the amount of profits made
through promoters. Though, it should be remembered that secret
profits on the sale of property can be recovered from the promoter only
when the property was bought and sold to the company while he was
acting as a promoter. The promoter necessity act honestly and
diligently to escape liability with respect to dealing with the future
company and the outsiders.
Duty of promoters towards future allottees: The promoters stand in a
fiduciary location towards the company. It does not mean that they
stand in such relation only to the company but they also stand in this
location to the future allottees of shares. The promoters necessity
ensure that the prospectus issued at his instance contains all material
facts and particulars and does not contain any mis-statements.

LIABILITIES OF PROMOTERS
You have presently gone through the duties of a promoter in his fiduciary capability and
learnt that in the event of any breach the promoter can be made liable to hand in excess of to
the company, any secret profit made through him. The company can also file a suit for
recession of the contract of sale made through the promoter if the promoter
has not made a disclosure of his interest to the company. The liability of the
promoter, under the Companies Act, is discussed below:
Set out in the prospectus: If this provision is not compiled with, the
promoter may be held liable through the shareholders.
Section 62 discusses the civil liabilities for any mis-statements made
in the prospectus: Under this section the promoter can be held liable
for any false statements in the prospectus, through a person who has
subscribed for the shares and debentures of the company acting on the
faith of the prospectus. The promoter may be held liable to pay
compensation to every person who subscribes for shares or debentures
for any loss or damage sustained through him on account of the untrue
statements made in the prospectus. Under Section 62 specific
provisions have also been made of the ground on which the promoted
can avoid his liability. These remedies are general persons who can be
held liable for mis-statement in the prospectus.
Section 63 discusses the criminal liabilities for issuing a prospectus
which contains untrue statements: It is clearly provided that in
addition to the civil liability mentioned in the above two cases, the
promoters can be held criminally liable if the prospectus issued
through them contained mis-statements. The punishment prescribed is
imprisonment extending upto two years or a fine upto 5000 rupees or
both. The promoter may have to bear this criminal liability for mis-
statements unless he can prove that the untrue statement Wars
immaterial or that he was justified in believing, because of reasonable
grounds, that the statement was true at the time of issue of prospectus.
Section 478 states the power of the court to order public examination
of all the promoters held guilty of fraud in promotion or formation of a
company: If in the event of winding up of the company the liquidators
statement alleges a fraud in the promotion or formation of the
 company, the promoter can also be held liable for public examination
through the Court, like any other director or officer of the company.
Section 543 of the Act gives for the liability for misfeasance or breach
of trust through misapplication of funds throughout the formation of
the company: Like any other director or officer of the company, a
promoter can also be held liable if he had misapplied or retained any of
the property of the company or is establish guilty of breach of trust or
misfeasance in relation to the company,
Section 203 gives that the court may suspend a promoter from taking
part in the management of the company distant a era of five years if he
is convicted of any offence in connection with the promotion,
formation or management of a company.
The promoters are personally liable for pre-incorporation contracts.
Even the death of the promater does not relieve him from this liability.

REMUNERATION OF PROMOTERS
Before the company is brought into subsistence he has to complete all the formalities,
spend considerable ability and effort, and organize necessary possessions so that the company
can be shaped. He has to incur preliminary expenses as well. For all these significant
behaviors and his considerable effort he should be suitably remunerated. Though, he is also in
a peculiar location for doing all these behaviors for a company that is not yet in subsistence.
The promoters cannot claim as a matter of right any remuneration from the company. He, so,
is not entitled to recover any remuneration for his services unless the company after getting
shaped enters into a specific contract with the promoter for this purpose. You necessity note
that even if the promoter has entered into a contract with the prospective directors before the
incorporation, he has no valid claim against the company for remuneration. This is so because
the directors cannot enter into any contract on behalf of a company that is not yet in
subsistence. There are also cases where the articles of a company may specifically give that a
specified sum may be paid to the promoters as remuneration for their services. While this
provision provides the director an authority to create such payment, it does not provide the
promoters a right to claim remuneration or to sue the company, for the similar. In actual
practice, so, the company, once it is registered, usually agrees to pay some remuneration for
the valuable services rendered through the promoters. This remuneration may be paid to the
promoters in any of the following ways:
He may be allowed to sell his own property to the company for cash at
a price higher than the valuation, after he has made a full disclosure in
 relation to the valuation and the profit earned to an self-governing
Board of directors.
If the promoter has purchased some business or some other property to
be sold to the company, he may sell the similar to the company at a
higher price after creation a full disclosure of the price paid' and the
profit earned.
The company may allot to the promoters fully paid up shares of the
company.
He may be paid a sure lump-sum through the company as a
remuneration for services rendered.
He may be given a commission at a fixed rate on the shares sold.
The company may provide him an option to subscribe for a sure
number of the company's unmissed shares at par. This option is usually
limited to a sure era which means that the promoter necessity subscribe
to the shares within a sure time.

The remuneration to the promoter may be paid in any of the ways mentioned above.
Whatever is the manner in which the company chooses to compensate for the services of the
promoter, the amount of remuneration and the manner of payment necessity be disclosed in
the prospectus, if the remuneration is paid within two years preceding the date of the
prospectus.

LOCATION OF PRELIMINARY CONTRACTS

In order to fulfill the necessary formalities and organize the required possessions for the
formation of the company, the promoters of a company enter into contracts for a company
which is yet to be incorporated. These contracts are usually entered into through the promoters
in order to acquire some property or some rights for the company that they are interested in
promoting. All such contracts entered into through the promoters with the third parties for the
proposed company (before incorporation) are described „„preliminary contracts'.

You necessity note that such preliminary or pre-incorporation contracts are not legally
binding on the company even after its incorporation. The cause for this is that before
incorporation the company cannot enter into contract as it has no legal entity. Not only this,
the company cannot ratify such contracts after incorporation because, for valid ratification, the
principal necessity have been in subsistence at the time when the promoters entered into such
contracts. A company can neither sue nor be sued on such contracts since a company before
incorporation is a non- entity. The location of these contracts can be explained as follows.
On registration, the company is not bound through the preliminary
contracts — a company is not bound through the preliminary contracts
even if the company has taken the benefit of the work on its behalf
under the contract. For instance, a solicitor was appointed through the
promoters of the company and was instructed through them to prepare
the articles and the memorandum of the company. The solicitor also
paid the necessary registration fee of the company. These promoters
later became the directors of the company. The solicitor sued for his
expenses and the fees paid through him. It was held that since the
company was not in subsistence when these expenses were incurred,
the company is not bound to pay.
The company cannot enforce preliminary contracts — you necessity
note that presently as the company cannot be held liable for the
preliminary contracts, it also cannot enforce such contracts made
before incorporation, through the promoters. This means that on
account of a preliminary contract the company does not get a right to
sue the third party for fulfillment of the contract. For instance, 'X' the
owner of a piece of land in Assam agreed to lease it to a company to be
shaped through promoters A, B, and C. The promoters later on shaped
a company described M.Pvt. Ltd. On some prospecting of the land, it
was exposed that there was a definite possibility of striking oil in that
land. Subsequently „X‟ refused to grant the lease to the company
M.Pvt.Ltd. It was held that the company cannot sue 'X' and cannot
claim specific performance as it was not even in subsistence when the
lease was signed. In relation to the above two principles, significant
provisions have been made in our country in the Specific Relief Act,
1963. These provisions give an significant exception to the above
principles. According to Section 15 and 19 of the Specific Relief Act
"where the promoters of the Company have, before its incorporation,
entered into contracts for the purpose of the company and such
contracts are warranted through conditions of incorporation, specific
performance may be obtained through or against the company, if the
company has accepted the contract after the incorporation and has
communicated such acceptance to the other party". The term "contracts
for the purposes of the company" means contracts which are necessary
for the incorporation and working of the company. For instance,
contracts for the preparation and printing of the memorandum and
articles or contracts for the supply of necessary raw material for the
manufacture work in the company are contracts for the purposes of the
company. It should be clear to you now that in order to be enforceable,
it is necessary that the company after its incorporation accepts the
contract and communicates its acceptance to the other contracting
party.
The company cannot ratify the preliminary contracts — after
incorporation the Company cannot ratify the contracts shaped before
its subsistence. You will recall from your revise of the Unit on agency
that for valid ratification of a contract, it is essential that the principal
necessity exist of the date when the contract is originally entered into.
And as the company does not exist on the date of contract, it cannot
ratify a preliminary contract on being incorporated. In the case of
Kelner v.Baxter, it was held as the company was not in subsistence
when the preliminary contracts were made; it could not be bound
through any purported ratification. What the company can' do is to
enter into a new contract with the vendors after incorporation to
provide effect to the conditions of the contract made before
incorporation.
Liability of the promoter for preliminary contracts — the promoters are
personally liable for contracts made for a company which is not yet in
subsistence. You have already learnt that the company is neither bound
nor entitled on account of a preliminary contract. So, it is the
promoters alone who remain personally liable for the preliminary
contracts. The cause for this is that the preliminary contract is made for
a company which, as recognized to both the contracting parties, is as
yet non—existent. The contract, so, is deemed to be personally entered
into through the promoters and they will be held personally liable for
 the performance of these contracts. The preliminary contracts made
through the promoters usually contain a provision that if the company
adopts the agreements on incorporation, the liability of the promoters
shall come to an end and if the company does not adopt the
preliminary contract within a specified era either party may rescind the
contract in such a case liability of the promoter will cease on the expiry
of the specified era.

REVIEW QUESTIONS
Describe the term 'promoter' and explain the functions performed
through him.
Talk about the legal location of a promoter.
What are the fiduciary duties of a promoter towards a company
promoted through him?
Talk about the liabilities of a promoter.
What do you understand through preliminary contracts? Talk about (a)
the location of the company in relation to the preliminary contracts,
and (b) the liability of the promoter for a preliminary contract.
 CHAPTER 4

Formation of Company

STRUCTURE
Learning objectives
Stages in the formation of a company
Promotion
Documents to be filed with the registrar
Incorporation
Commencement of business
Review questions

LEARNING OBJECTIVES
After learning this chapter, you should be able to:
Describe the stages in the formation of a company,
Enumerate the documents to be filed with the registrar,
Explain the effects of registration,
Explain the meaning of the certificate of incorporation, and
Describe the procedure for obtaining the certificate of commencement
of business.

STAGES IN THE FORMATION OF A COMPANY

The formation of a company is a lengthy procedure. It involves the following three stages:
Promotion
Registration or incorporation, and
Commencement of business

Each of the above stages comprises specific behaviors to be undertaken. Figure 4.1
provides you an overview of the behaviors involved in the several stages of formation of a
company.
PROMOTION

After detection of the business thought and judging its soundness, the promoters organize
the necessary possessions for giving form to their business thought. They negotiate for, and
obtain the required property, the necessary plant, and machinery and arrange for the capital
necessary for the company. The promoters will also talk to persons who are willing to take the
responsibility of becoming the first directors of the company.

It should be noted that a company can be shaped only for a lawful purpose. The purpose
of the company may be unlawful if it is:
Against any provisions of the company law, or
Against the provisions of any other law applicable in India.

In case of a company with limited liability, the liability of members may be limited either
through shares or through guarantee.

The promoters then obtain the approval of the proposed name from the Registrar of
Companies. For this purpose, the promoters shall select a few appropriate names in order of
preference and would then apply on prescribed form to the Registrar for registration.
 Section 20 of the Act gives that no company shall be registered through a name, which in
the opinion of the Central Government, is undesirable i.e., the name should not be identical
with, or too almost resemble, a name through which a company is already in subsistence.

Before an application for registration is filed with the Registrar of Companies, the
promoters shall take the necessary steps for preparing the significant documents such as
'memorandum of association' and 'articles of association'. For this, the promoters may seek the
half of a legal expert, a solicitor, or a company secretary. These documents should be duly
printed. Though, a public company limited through shares need not prepare its own articles. It
can adopt 'Table A' as given in Schedule I of the Act, The memorandum and articles have to
be stamped and the value of the stamp differs from state to state as per the respective state
stamp laws.

Section 15 requires that every memorandum should be signed through each subscriber
who should provide his address, account and job, if any, in the attendance of at least one
witness who shall attest the signature, and the witness is also required to provide his address
and account of his job, if any. The articles of association should also be signed separately
through subscribers. Though, it is not necessary that the promoters themselves should sign the
memorandum and articles. These documents may be signed through' an agent provided he is
authorized through a Power of Attorney in. this behalf.

The written consent of directors to act as such is also to be filed. But, in the case of a
private company, it is not needed. The directors are required to provide a written undertaking
to take up and pay for their qualification shares.

The fee prescribed for registration of a company is required to be paid to the Registrar. A
statutory declaration is also to be filed that all the necessities of the Act and the rules there
under have been complied with.

Besides these steps depending upon the peculiar nature of the company and its objects,
the promoters may be asked to comply with sure other necessities of the Companies Act with
respect to registration. They may contain (i) obtaining the license under the Industries
(Development and Regulation) Act, 1951, (ii) entering into preliminary contracts, (iii) obtain
in consent of the Controller of Capital Issues, if the company wishes to raise capital through
issue of shares or debentures, and (iv) preparing prospectus or a statement in lieu of
prospectus, as the case may be.

DOCUMENTS TO BE FILED WITH THE REGISTRAR

After the promoters have got the necessary documents prepared, these are required to be
filed with the Registrar of companies. The documents that are necessary for the purpose of
registration are as follows:
Memorandum of Association: The Memorandum of Association is the
charter of the company. It needs to be originally prepared for every
company. It defines the objectives for which the company is being
shaped. The memorandum through its clauses, describes the whole
character of the company. This comprises its objectives, its name, the
nature of its liability, the address of its registered office, the capital
which the company is authorized to have as well as the names,
addresses and agreement of people who agree to form the company.
The memorandum defines the powers of a company and its dealings
with third parties. For purposes of registration, the promoters have to
file with the Registrar of companies, a duly signed and properly
stamped printed memorandum of association.
Articles of Association: The articles of association contain the rules
and regulations for managing the internal affairs of the company and,
so, govern the connection flanked by the company and its members. A
private company necessity prepare its own articles because the articles
impose restrictions on the right to transfer shares, prohibit invitation to
the public to subscribe to its share capital and restrict the maximum
number of members to fifty. It is not necessary for a public company
limited through shares to file the articles of association. If a public
company does not file its articles and chooses to remain silent in
relation to the similar, it is deemed to have adopted 'Table A' of
Schedule I of the Act. This table is a model set of articles given in the
Act 7. The articles of association should also be signed separately
through subscribers and they should also be attested through a witness.
Copy of the proposed agreement: According to the Companies
Amendment Act, 1988 a clause has been inserted in the Act which
gives that if a company proposes to enter into an agreement with any
individual for appointment as its managing director, or a whole time
director or manager, a copy of such an agreement should also be filed
with the Registrar beside with the other documents.
Statement of nominal Capital: In case of a company limited through
shares or through guarantee, and having a share capital, the promoters
necessity also file a statement declaring the amount of nominal capital
with which the company is proposed to be registered. Normal capital is
also described the 'authorized capital It means the amount of capital
which a company is authorized to issue. The nominal capital is divided
into shares of a uniform fixed value. The authorized capital necessity
be clearly defined in the memorandum of association in its capital
clause. The amount of nominal capital for a company depends upon its
projected capital requirement. In accordance with the provisions of
Capital Issues (Control) Act, 1947, if the company proposes to raise
more than one crores of rupees within twelve months of its
incorporation through the issue of shares or debentures, the promoters
should also obtain and file the consent of the Controller of Capital
Issues.
Address of the registered office of the company: Though not required
for the purposes of registration, the address of registered office of the
company is usually filed with the Registrar, through both private and
public companies. In case it is not given at the time of filing of other
documents, it should be filed within thirty days of incorporation. A list
of persons who have agreed to become the first directors of the
company should also be filed. This is not necessary in case of private
companies. The directors of a public company have also to provide a
written undertaking to take up and 'pay for their qualification shares.
Statutory declaration: Lastly, the promoters necessity file a statutory
declaration in the prescribed form stating that all necessities of the
Companies Act and its rules relating to registration have been
complied with. This declaration may be signed through any of the
following,
An advocate of the Supreme Court or of a High Court; or
An attorney or a pleader entitled to appear before a High Court; or
A secretary, or a chartered accountant practicing in India and who has
been occupied in the formation of the company; or
 Through a person named in the articles as a director, manager or
secretary of the company.

INCORPORATION
When the necessary documents have been delivered to the Registrar and the requisite fees
paid, the Registrar shall scrutinize these documents and if he is satisfied that (a) all the
documents are in order, (b) all the necessities of the Companies Act in respect of registration
have been complied with, and (c) the objects for which the company is to be shaped are
lawful; he shall enter the name of the company in the Register of Companies maintained
through his office. He would then issue a certificate, under his signature, certifying that the
Company is incorporated. This certificate is described the 'Certificate of Incorporation'. This
certificate contains the name of the company, the date of its issue, and the signature of the
Registrar with his seal. Certificate of Incorporation constitutes the company's birth certificate
and the company becomes a body corporate, with perpetual succession and a general seal. The
company comes into subsistence on the date given in the Certificate of Incorporation.

If the Registrar is of the view that there are some minor defects in any document, he may
require that the defects be rectified. But, if there are some material and substantial defects, the
Registrar may refuse to register the company.

The procedure for incorporation of a private company is similar to that for a public
limited company. Though, in case of a private company, the necessary documents viz. , the
memorandum of association and the articles of association should be signed through at least
two persons in contrast to seven in case of a public company. The written consent of the
directors of a private company need not be filed. Though, the articles of a private company
necessity be registered with the Registrar and it necessity incorporate the restrictions imposed
through Section 3(l) (iii) of the Companies Act.

Conclusiveness of Certificate of Incorporation

A certificate of incorporation given through the Registrar of Companies in respect of any

association shall be conclusive proof that all the necessities of Companies Act have been
complied with in respect of its registration as well as matters precedent and incidental thereto.
This is also recognized as rule in Peel's case.

In this case, the memorandum was establish materially altered after the signatories had
signed but before registration. It was held that the corporate status remained unaffected and
the certificate of incorporation was valid. Highlighting the necessity of this rule, Lord Cairns
observed as follows:

"When once the memorandum is registered and the company holds out
to the world as a company undertaking business, willing to receive
shareholders and ready to contract engagements, then, it would be of
the mainly disastrous consequence if after all that has been done, any
person was allowed to go back and enter into an examination of the
circumstances attending the original registration and the regularity of
the execution of the documents.”

As is clear from the statement once the Registrar has issued the certificate of
incorporation, nothing further is to be inquired into and the validity of this certificate cannot
be disputed on any ground whatsoever. In Moosa Goolam Arif v Ebrahim Goolam Arif, the
memorandum of association of a public limited company was signed through two adult
persons. Other five members of the company were minors. Their guardian made separate
signatures for each of the minors. The Registrar registered the company and issued the
certificate of incorporation. The incorporation of the company was challenged and the plaintiff
prayed that the certificate of incorporation should be declared void. The Privy Council
rejected the plea of the plaintiff and held that the certificate of incorporation was valid.

The certificate of incorporation is also a conclusive proof of the information that the
company came into subsistence on the date mentioned in the certificate. In the case of Jubilee
Cotton Mills Ltd. v Lewis, the company delivered to the Registrar of Companies documents
required for the registration of the company on 6th January. On 8th January, the Registrar
registered the company and issued the certificate of incorporation but dated it January 6.The
company allotted few shares to Mr. Lewis on 6th January. The allotment was challenged and
the court was requested to declare the allotment as void. The court held that the certificate of
incorporation is conclusive proof of all that it contains. Hence, the company shall be deemed
to have been shaped on 6th January and allotment of shares was valid.

It should, though, be noted that the certificate of incorporation is not the conclusive proof
with respect to the legality of the objects of the company, mentioned in the objects clause of
the memorandum of association. As such, if a company has been registered whose objects are
illegal, the incorporation does not validate the illegal objects. In such a case the only remedy
accessible is to wind up the company.
Effects of Registration

You have presently learnt that the certificate issued through the Registrar of Companies is
described the 'certificate of incorporation'. This certificate is a very significant document for
the company because the company begins its corporate life from the date of the certificate.

On filing of documents like memorandum of association, articles of association, the

proposed agreement etc., the Registrar shall issue a Certificate of Incorporation to the
company. In this certificate he shall certify that the company has been incorporated. If the
company is a limited company, the Registrar shall further certify that the company is a limited
company.

From the date of incorporation i.e., the date mentioned in the certificate of incorporation,
the company becomes a legal person separate from its members. Section 34 clause 2 describes
the effects of registration which are as follows:
From the date of incorporation, the original subscribers to the
memorandum as well as the other persons who may, from time to time,
become members of the company, shall constitute a body corporate
through the name contained in the memorandum of association. It
becomes a legal person. The company's life starts from the date of its
incorporation.
The company acquires a perpetual succession. The consequence of it
may be understood better through an instance. If a company had ten
shareholders and all of them die at the similar time in a train accident,
the company's subsistence will not be affected. In other words we may
say that the members may come and members may go, but the
company goes on till it is wound up.
The company will have a general seal.
The company can sue and be sued in its own name.
A private company is entitled to commence business immediately after
obtaining the certificate of incorporation.
Liability and debts of the company are not the liability of the
shareholders 1 members. They are, though, liable to contribute to the
assets of the company, in the event of its being wound up, to the extent
of their contract or guarantee, as the case may be.
 The company will hold its property in its own name. The property of
the ' company is not the property of the shareholders.
The memorandum and articles of association become binding on the
members and the company. This articles are deemed to be a contract
flanked by the company and its members and would, after
incorporation, govern the rights
Of members against the company
Of company against the members, and
Flanked by members inter se.

COMMENCEMENT OF BUSINESS
You know that a company comes into subsistence when it receives the certificate of
incorporation. A private company can commence its business immediately after getting the
certificate of incorporation. But, a public limited company will have to obtain another
certificate recognized as the 'certificate to commence business' before it can start its business.
Though, a public company having no share capital can also commence business immediately
on getting the certificate of incorporation. It, so, follows that a public company having share
capital, is required to fulfill some more formalities before it obtains the certificate to
commence business.

Certificate of Commencement of Business

If a public company, having share capital, has issued a prospectus, inviting the public to
subscribe for its shares or debentures, it cannot commence any business until
The company has received in cash, the amount mentioned in the
prospectus as minimum subscription and the shares upto the amount of
minimum subscription have been allotted,
every director has paid to the company, in cash, the application and
allotment money on the shares taken or contracted to be taken through
him:
no money is liable to be repaid to the applicants for failure to apply for
or to obtain permission for the shares or debentures to be listed on any
recognized stock swap:
 where the shares of the company are to be quoted on the stock swap,
requisite application necessity have been submitted to the stock swap
and approval obtained within the stipulated time;
the prescribed stamp duty as prescribed through the Indian Stamp Act
and as prevalent in that State in which the company is registered is
paid;
a treasury challan showing payment of prescribed fee is attached; and
A statutory declaration on duly verified in the prescribed form has
been filed with the Registrar. The declaration should specify that
clause (i), (ii), and (iii), as above have been complied with. The
declaration should be verified through one of the directors or the
Secretary of the Company. Where the Company has not appointed a
Secretary, the declaration may be verified through a practicing
Secretary.

If the company has a share capital but does not issue a prospectus inviting the public to
subscribe for its shares, the company cannot commence any business unless
The company files with the Registrar, a statement in lieu of prospectus,
beside with the statement specified in Part II of Schedule III. The
statement should be filed with the Registrar at least three days before
the first allotment.
a declaration that every director of the company has paid to the
company, in cash, the application and allotment money on the shares
taken or contracted to be taken through him
A duly verified declaration in the prescribed form has been filed with
the Registrar at least three days before the first allotment is made. The
declaration should specify that the above circumstances have been
complied with and should be verified through one of the directors or
the Secretary of the Company. In case the company has not appointed
a Secretary, the declaration may be verified through a Secretary in
whole time practice (Section 149).

When the necessities are duly fulfilled, the Registrar shall issue a certificate recognized as
'certificate of commencement of business'. This document certifies that the company is
entitled to commence business and is also a conclusive proof of the information that the
company is so entitled. If any company commences business in contravention, of these
provisions, every person who is responsible for the default shall be punishable with fine which
may extend to five hundred rupees for every day throughout which the default continues
[Sec... 149(6)]. It should be noted that the company necessity commence business within one
year of its incorporation or otherwise it is liable to be wound up through the Court
[Sec.433(c)].

You should, though, note that a public company having share capital cannot commence
any business unless this certificate is obtained. Any contract made before, obtaining the
certificate to commence business but after incorporation shall be „provisional and shall not be
binding on the company until this certificate is obtained.

An motivating question arises as to the location of contracts entered into through the
public company after incorporation but before the receipt of certificate of commencement of
business. According to Section 149(4) such contracts are purely provisional in nature and shall
not be binding on the company until the date on which it becomes entitled to commence
business. So, if a company enters into contract after its incorporation but never gets the
certificate to commence business, contracts of entered shall not be binding upon the company.
Though, on the issue of the commencement certificate, such contracts become automatically
binding on the company and need no ratification. Let us explain this point through taking an
instance. AJ a furniture dealer entered into a contract with the company for supplying some
furniture to the company. The company went into liquidation before it could obtain the
certificate of commencement of business. A will not succeed in recovering the amount from
the company because the company never became entitled to commence business.

REVIEW QUESTIONS
Describe the term 'promoter' and explain the functions performed
through him.
Talk about the legal location of a promoter.
What are the fiduciary duties of a promoter towards a company
promoted through him?
Talk about the liabilities of a promoter.
Is a promoter entitled to remuneration for the services rendered
through him throughout the formation of the company? List the ways
in which a promoter might be given remuneration.
 PART 2. PRINCIPAL DOCUMENTS
CHAPTER 5

Memorandum of Association
STRUCTURE
Learning objectives
Meaning and purpose of memorandum
Form of memorandum
Contents of memorandum
Alteration of dissimilar clauses in the memorandum
Review questions

LEARNING OBJECTIVES
After learning this chapter, you should be able to:
Explain the meaning and purpose of Memorandum of Association
Describe the dissimilar shapes of Memorandum of Association
List the dissimilar clauses of the Memorandum of Association
Explain the doctrine of ultra vires
Explain the procedure for alteration of dissimilar clauses of
Memorandum of Association.

MEANING AND PURPOSE OF MEMORANDUM

Under Section 2(28) of the Companies Act, Memorandum means the memorandum of
association of a company as originally framed or as altered from time to time in pursuance of
any previous company law or of this Act. But this definition is not an exhaustive one.
Lord Cairns in the well-known case of Ashbury Railway Carriage Co. V. Riche defined
memorandum as following—the memorandum of association of a company is its charter and
defines the limitations of the powers of the company.

The Memorandum of Association of a company is its charter. It contains the fundamental

circumstances upon which alone the company can be brought into subsistence. It tells us what
the company can do as specified in its objects clause. The objects clause is an significant
clause in the Memorandum, as it tells us the scope of behaviors of the company. The
company's actions cannot go beyond this clause. Therefore, it defines as well as confines the
sphere of behaviors of the company. If the company does something beyond the objects as
given in the Memorandum, that will be ultra vires (beyond powers) of the company and is
declared through law to be void.

The Memorandum of Association is a public document open for inspection through any
member of the public, so, every person who deals with the company is presumed to have the
knowledge of its contents. The main purpose of the Memorandum of Association is to enable
its shareholders, creditors and all those who deal with the company to know what its powers
are and what is the range of its behaviors. Therefore the intending shareholder can discover
out the field in, or the purpose for which his money is going to be used through the company
and what risk he is taking in creation the investment. Also anyone dealing with the company,
say, a supplier of goods or a lender of money, will know whether the transaction he intends to
create with the company is within the objects of the company or not. In case, he discovers that
the contract, which he intends to enter into with the company, does not fall within the purview
of objects as stated in the Memorandum, he would, for his own interest, refrain from entering
into the planned contract.

FORM OF MEMORANDUM
Section 14 of the Companies Act, 1956, requires that the Memorandum of a company
necessity be in one of the Shapes given in Schedule 1 to the Companies Act, 1956 as may be
applicable to the case of the company, or in a Form as close to thereto as circumstances admit.
The dissimilar shapes are applicable to dissimilar kinds of companies.
The following model Shapes of Memorandum are given in the aforementioned schedule:

Table B : A Company limited through shares.

Table C: A Company limited through guarantee and not having a share
capital.
Table D: A Company limited through guarantee 'and having a share
capital.
Table E : A Company having unlimited liability.

The Memorandum of Association necessity be printed, divided into paragraphs,

numbered consecutively. It is to be signed through at least 7 persons in the case of a public
company and through at least 2 in the case of a private company. The persons signing the
Memorandum are recognized as „subscribers to the Memorandum'. Every subscriber necessity
provide his address and job. Their signatures are required to be witnessed through at least one
witness. The witness has also to provide his address and job. A subscriber cannot witness the
signature of another subscriber. Each of the subscribers necessity take at least one share and
write opposite his name in the Memorandum the number of shares he is subscribing for.
CONTENTS OF MEMORANDUM
You have learnt the meaning and purpose of the Memorandum of Association. Let us now
revise the contents of the memorandum. Section 13 of the Companies Act requires the
Memorandum of a company limited through shares to contain:
The name of the company, with "Limited" as the last word of the name
in the case of a public limited company, and with "Private Limited" as
the last words in the case of a private limited company.
The name of the state, in which the Registered Office of the company
is to be situated, the objects of the company, stating separately as (i)
"Main objects" and (ii) "Other objects" not incorporated in (i).
The declaration in the case of a company limited through shares or
through guarantee that the liability of the members is limited.
In the case of a company having a share capital,
The amount of share capital with which the company is to be registered
and the division thereof into shares of a fixed amount (this provision is
not applicable in the case of an unlimited company),
Every subscriber of the memorandum has to take at least one share,
and he shall write opposite his name the number of shares he takes.

From the provisions of Section 13, we may list the following main clauses of the
Memorandum of Association:
Name Clause
Situation Clause (Registered office clause)
Objects Clause
Liability Clause
Capital Clause
Association Clause (Subscription clause)

Name Clause

The Memorandum of every company necessity state the name of the company with the
word "Limited" as the last word of the name in the case of a public Limited company and with
"Private Limited" as the last words of the name in the case of a private limited company, As
you are already aware that a company is a legal person, it necessity have its name through
which it will be recognized.

A company may choose any name but it necessity not be undesirable in the opinion of the
Central Government (Section 20), The Department of Company Affairs (the Government of
India) has formulated sure guidelines for deciding cases of creation a name accessible for
registration under the Companies Act, 1956. Also the proposed name should not be identical
with or too closely resemble the names of an already existing company.

Further, the name of the proposed company should not contravene the provisions of the
Emblems and Names (Prevention of Improper use) Act, 1950 which prohibits the use of sure
names. This Act prohibits the use of the name and emblem of (a) U.N.O. and W.H.O., (b)
Indian National Flag, (c) The Official Seal and Emblem of Central and State Govt, and (d) the
name and pictorial representation of Mahatma Gandhi and the Prime Minister of India.
Therefore the proposed name, if it suggests Government patronage, where it is not there, then
it will not be allowed to be registered with such name.

Publication of the company's name: Once the name is registered, it necessity be painted or
affixed on the outside of every office or lay of business in a conspicuous location, in letters
easily legible, in the language in common use in the locality. It necessity also be engraved on
the seal of the company and mentioned in all notices, advertisements, bills. letter heads etc.
Non-compliance of these provisions renders the company and its officers in default liable to
fine (Section 147).

Registered Office Clause

This clause states the name of the State in which the Registered Office of the company
will be situated. Every company necessity have a registered office, which establishes its
domicile. In information, it is also the address where company's statutory books necessity
normally be kept and to which notices, and all other communications can be sent.

In the Memorandum, only the name of the State in which Registered Office is to be
situated, is to be mentioned. The exact address of the Registered Office may be communicated
later to the Registrar of Companies, but not later than 30 days from the date of incorporation
of the company (Section 146).
Objects Clause

This clause defines the objects of the company and therefore designates the sphere of its
behaviors. A company cannot do anything beyond or outside its objects clause and any act
done beyond them will be ultra vires and void. Such an act cannot be ratified even through
the: assent of the whole body of shareholders;

The company may, though, do anything which is incidental to and consequential upon the
objects specified, and such act is not to be measured as ultra vires. Therefore, a trading
company has an implied power to borrow money, draw, and accept Bills of Swap.

Section 13 requires every company to divide its objects Clause into the following two
parts:
The main objects of the company. The objects which are incidental or
ancillary to the attainment of the main objects are also sheltered in this
part.
Other Objects of the company not incorporated in (i) above.

The objects given in (ii) contain those objects of the company, which it is going to pursue
after it is incorporated. In information, section 149 requires that as and when a company wants
to pursue an substance given in the "Other Objects Clause", the company can do so only after
the company in common meeting has passed a resolution authorizing the company to do sq
(Section 149).

You should note that the objects of the company necessity not be illegal, immoral, or
opposed to public policy or in contravention of the Companies Act, 1956, For instance,
Section '77 prohibits a company from purchasing its own shares, Section 209 prohibits
payment of dividend out of capital. Therefore if the objects clause permits the company to
purchase its own shares or to pay dividend out of capital, it will be ultra vires and void.

The objects clause necessity be cautiously drafted but it necessity be in a clear and
unambiguous language. This clause enables the shareholders and the creditors to know the
purposes for which the funds of the company are going to be used.

Liability Clause

This clauses contains the nature of liability of the members of the company. This clause is
necessary where the liability of the members is limited. So, this clause shall not be
incorporated in the case of an unlimited company. As you know that a company may be
limited through shares, or through guarantee. In case the company is limited through shares,
the liability clause necessity state that the liability of the members shall be limited through
shares. It means that the liability of a member is limited to the nominal value of shares held
through him. In case the shares are partly paid, then no member can be described upon to pay
more than the amount that remnants unpaid on his shares. Therefore, a member is liable to pay
only the unpaid amount on his shares and no further. For instance: A shareholder holds a Rs.
10 share and has paid Rs. 7.50 on it so distant. He can be described upon to pay Rs, 2.50 and
nothing more.

In the instance, if he holds a fully paid-up share, then his liability is nil.

In case of a company limited through guarantee, the liability of a member is limited to the
amount which he has agreed to contribute to the assets of the company in the event of its
liquidation.

If a company limited through guarantee has a share capital, then the liability of the
member is two fold. He is liable to pay the amount remaining unpaid on the shares as and
when he is described upon to pay and he is also liable upto the amount of guarantee, whatever
it may be, but only if he is described upon to contribute to the assets of the company at the
time of winding up.

Capital Clause

This clause necessity indicate the amount of capital with which the company is registered,
and is recognized as Registered or Authorized or Nominal capital.

In the case of a public company having a share capital, a share may be either a Preference
share or an Equity share. Therefore a company's capital may be Preference share capital and
Equity share capital. This clause shall state the number and value of shares into which the
capital of the company is divided.

These shares are of a sure fixed value or amount. This fixed value is recognized as the
"Par" or "nominal" value of a share. Therefore the nominal value of an equity share may be
Rs. 10, and that of a Preference share Rs. 100.

The effect of this clause is that the company cannot issue more shares than arc authorized
through the Memorandum.
Association Clause or Subscription Clause

In this clause the subscribers to the Memorandum of Association create the following
declaration:
"We the many persons whose names and addresses are subscribed, are
desirous of being shaped into a company in pursuance of the
Memorandum of Association and we respectively agree to take the
number of shares in the capital of the company set opposite our
respective names",

According to Section 12 of the Act, the Memorandum shall be signed through at least
seven subscribers in case of a public company and at least two subscribers in case of a private
company. Each subscriber should sign the memorandum in the attendance of at least One
witness who necessity attest the signature. Each subscriber necessity take at least one share
and write opposite his name in the memorandum the number of shares he is subscribing for.

Doctrine of Ultra Vires

The term 'Ultra' means 'beyond' and the term arise means the 'powers. Therefore, ultra
vires a company means 'beyond the powers of a company‟. You have learnt that the objects
clause of the Memorandum states the objects of the company, so, any act which is beyond the
stated purposes is ultra vires the company and, so, null and void. The company shall not be
bound through such acts which are ultra vires the company. The purpose of the doctrine of
ultra vires is to protect the interests of members, outsiders, and creditors. They are:
The members of the company know the purposes for which their
money can be used through the company.
The third parties dealing with the company know the purposes for
which the company has been brought into subsistence and, so, restrict
their transactions with the company to those purposes only. Likewise,
the creditors are assured that the assets of the company shall not be
risked in unauthorized business.

Therefore in order to protect the interests of the shareholders and the third parties who
enter into contracts with the company, the company's behaviors are confined to the objects
given in the Memorandum of Association. It cannot do anything beyond the objects clause and
if it does, it will be measured ultra vires (beyond capability) and void ab-initio.
 Ultra vires acts can be divided into the following three categories:
Ultra vires the Companies Act,
Ultra vires the Memorandum of Association, and
Ultra vires the Articles of Association.

Ultra Vires the Companies Act

Any act done contrary to or in excess of the scope of Companies Act will be ultra vires
the Act. Such an act shall be void and cannot be ratified even through a unanimous resolution
of all the shareholders. A few examples of such acts are as follows:
Payment of dividend out of capital
Free sharing of bonus shares
Purchasing its own shares
Reducing the share capital without complying with legal formalities.

Ultra vires the Memorandum

The Memorandum defines and confines the powers of the company. The substance of the
company is determined through the Memorandum. A company cannot do anything which is
beyond the purview of the objects clause. Any act done in contravention of the substance
clause shall be ultra vires the Memorandum and shall be void and it cannot be ratified even
through an unanimous resolution of all the shareholders. The doctrine of ultra vires was first
applied in the well-known case of Ashbury Railway carriage and Iron Co. v. Riche. In this
case the company was incorporated to create, and bell, or lend on hire, railway carriages, and
wagons and to carry on the business of mechanical engineers and common contractors. The
directors of the company entered into a contract with Riche, a firm of railway contractors to
finance the construction of a railway row in Belgium. The contract was ratified through the
company through passing a special resolution at a common meeting. Later, the contract was
repudiated through the company on grounds of its being ultra vires and it was sued for breach
of contract. The House of Lords held that the contract was ultra vires the Memorandum and so
void. It could not be ratified through the shareholders, as the contract was ultra vires the
objects clause. The doctrine of ultra vires has been recognized in India as well. The doctrine
has been affirmed through the Supreme Court in A. L. Mudaliar v. LIC of India.
Ultra vires the Articles
Acts which are ultra vires the articles of associations but are within the powers of the
company are termed as ultra vires the articles. For instance, payment of interest on 'advance
calls' at a rate higher than allowed through the articles. Such act shall also be void, but the
company in Common Meeting may alter the articles through a special resolution and ratify
unauthorized acts.

Effects of Ultra vires transactions:

All act which is ultra vires the company shall be null and void and it
cannot be enforced against the company.
An ultra vires the company transaction cannot be ratified even through
the whole body of shareholders.
Not only the outsiders cannot enforce ultra vires transactions against
the company, the company can also not enforce such transactions
against third parties.
Whenever an ultra vires act has been or is in relation to the to be done,
any member of the company can approach the Court and get an
injunction restraining the company from proceeding with the ultra
vires acts.
The directors of the company can be held personally liable for any loss
caused through an ultra vires transaction.

It should be clear to you that if an act is ultra vires the company, then such act shall be
null and void. Therefore, if a company borrows money beyond its limit, it is ultra vires and the
lender has no right in respect of the loan against the company.

You should note that if an act is ultra vires the directors, but it is with in the powers of the
company then such an act is not altogether void. It can be ratified through the shareholders in
their common meeting and when it is so ratified, the company becomes liable for such acts.
Now, if the company has power to borrow, but it restricts the authority of the directors to
borrow upto a sure sum. If the directors exceed their authority and borrow more than what
they are authorized to borrow, then the company may, if it wishes, ratify the directors' act, in
which case the loan binds both the lender and the company as if it had been made with the
company's authority in the first lay.
ALTERATION OF DISSIMILAR CLAUSES IN THE
MEMORANDUM
You have learnt that the Memorandum of Association is a document of prime importance,
and so, it cannot be altered through the sweet will of the members of the company. The
Companies Act, 1956 has laid down the procedure for altering the several clauses of the
memorandum and the similar has to be followed strictly. Let us now talk about the procedure
for creation alterations in the dissimilar clauses of the memorandum.

Change of Name

The name of a company may be changed at any time through (i) passing a special
resolution at a common meeting of the company and with (ii) the written approval of the
Central Government. Though, no approval of the Central Government is necessary if the
change of the name involves only the addition or deletion of the word "Private" (i.e. when
public company is converted into a private company and vice versa).

If a company is registered with a name which is measured through the Central

Government as undesirable, it may change its name through passing an ordinary resolution
and obtaining the approval of the Central Government.

The change of name-necessity be communicated to the Registrar of companies within 30

days of passing of the said resolution. The Registrar shall enter the new name in the Register
of companies and shall issue a fresh certificate of incorporation with necessary alterations.
You should note that the change of name shall not affect any rights or obligations of the
company.

Change of Registered Office

The registered office of the company may at any time be shifted from one lay to another
but within the similar city the company is only required to inform the Registrar the few
address within 30 days of the change. But if the Registered Office is to be shifted from one
city to another, but within the similar state, a special resolution should be passed through the
company.

The Registered Office of a company may be shifted from one state to another through
passing a special resolution at its Genera) Meeting. Further this special resolution is required
to he confirmed through the Company Law Board. The Company Law Board, before
confirming the special resolution, will satisfy itself that enough notice has been given to every
credit and all other persons whose interests are likely to he affected through the alteration.
This notice is also required to be given to the Registrar of Companies and the Government of
the State in which the Registered Office of the company is situated.

The Company Law Board will provide an opportunity, to members and creditors of the
company, the Registrar of companies and other persons interested in the company. The
Company Law Board has authority to confirm the special resolution of the company subject to
such conditions and circumstances as it thinks fit.

The company in under an obligation to send a printed or a typewritten copy of the special
resolution to the Registrar of Companies within 30 days of passing thereof.

The company is also under an obligation to file a certified copy of the order of the
Company Law Board, within three months of the passing of the order, with the Registrar of
companies of each state—the old from which the registered office is being shifted and the new
to which it is to be shifted.

If the Company fails to file a certified copy of the order within the prescribed time, then
the alternation shall at the expiry of such era, become void and inoperative. Once the
Company has shifted its Registered Office to the new state, then it necessity send to the
Registrar of that state, the address of the Kegistered Office, within 30 days of shifting thereof.

It is to be noted that a company can shift its registered office from one state to another
state for sure purposes only. These are mentioned below under the heading "change of objects
clause.”

Change in Objects Clause

You know that the objects clause is the mainly significant clause and any alteration in this
clause has wide implications. So, some restrictions have been placed on the right of a
company to alter this clause. A company may, through passing a special resolution and getting
it confirmed through the Company Law Board, alter its objects clause if the alteration is
required to enable the company:
To carry on its business more economically and more efficiently,
To attain its main purpose through new or improved means,
To enlarge or change the local area of its operation,
 To carry on some business which under the existing circumstance may
be conveniently or advantageously combined with the business of the
company,
To sell or dispose of the whole, or any part of the undertaking of the
company,
To restrict or abandon any of the objects specified in the memorandum
or
To amalgamate‟ with any other company or body of persons.

The company is under an obligation to file a printed or a kind written copy of the special
resolution with the Registrar of Companies within 30 days of the passing thereof. Further, the
company has to file a petition with the Company Law Board for confirmation of the special
resolution passed at the common meeting. The Company Law Board has to satisfy itself that
the notice of the special resolution was given to all persons, whose interests are likely to be
affected through the alteration. Also the notice necessity have been served on the Registrar of
companies and the State Government. The Company Law Board will provide an opportunity,
to all those to whom notice has been given, to be heard, There upon, on being satisfied the
Company Law Board may confine the alteration either wholly or in part or subject to such
circumstances as it thinks fit.

The company is under an obligation to send a certified copy of the order of the Company
Law Board jointly with a printed copy of the altered Memorandum to the Registrar of
companies, within three months of the passing of the order. The Registrar of Companies will
register them and issue, within one month, a certificate which will be conclusive proof that
everything required to be done under the law has been done. The alteration is effective from
the date of registration of the alteration.

If the required documents are not filed with the Registrar of Companies within the
prescribed time, the alteration and the order of the Company Law Board confirming the
alteration shall, at the expiry of such era, become void and inoperative.

Change in Liability Clause

You know that one of the main characteristics of a company is the limited liability of
members. Ordinarily, the liability clause cannot be altered so as to create the liability of the
members Memorandum of Association unlimited.
 A member of a company is bound to pay the nominal value of shares which he has
purchased. The company may inquire for some payment at the time of application, and some
at the time of allotment. The balance may be payable as and when described for. But the
company cannot demand, anything more than the nominal value of the shares held through a
member. A member may, though, agree in writing, to any alteration made in the
memorandum, which has the effect of raising his liability to contribute to the share capital of,
or otherwise to pay money to the company (Section 38).

Change in Capital Clause

The nominal or registered or authorized capital of a company may be increased as

provided in section 94 of the Companies Act, 1956. A company limited through shares, if so
authorized through its articles, may alter that condition of its Memorandum so as to augment
its share capital through such amount as it thinks expedient through issuing new shares. This
power to augment the authorized capital can be exercised through a company from time to
time. Usually, this power is exercised when the company has issued all its authorized capital
and requires more funds. Therefore , the share capital may be increased from Rs. 20,000 in
2000 equity shares of Rs. 10 each, through the addition of Rs, 30,000 in 10 percent 300
preference shares of Rs. 100 each. The additional share capital may consist of equity and/or
Preference Shares.

This alteration in the share capital necessity be made through the company in Common
Meeting. An ordinary resolution is enough to create the alteration. The notice convening the
meeting should specify the proposed augment or dissimilar kind of capital.

Where the capital has been increased, notice thereof necessity be filed with the Registrar
of Companies. Also a copy of the resolution authorizing the augment necessity be submitted
to the Registrar of Companies within 30 days of the passing thereof. Thereupon the Registrar
of Companies shall record the augment and also create any alterations which may be
necessary in the company's Memoranudm, of Association.

If default is made in filling the notice as aforesaid, the company, and every officer of the
company, who is in default shall be punishable with fine upto Rs. 50 per day throughout
which the default continues.

REVIEW QUESTIONS
What do you understand through Memorandum of Association?
What is the purpose of Memorandum of Association?
Enumerate the dissimilar clauses which are incorporated in the
Memorandum of Association.
Illustrate the Doctrine of ultra vires with appropriate examples.
Describe the procedure for alteration of the objects clause of a
company.
 CHAPTER 6

Articles of Association
STRUCTURE
Meaning and purpose of articles
Registration of articles
Contents of articles
Alteration of articles
Connection flanked by memorandum and articles
Distinction flanked by memorandum and articles
Effect of memorandum and articles
Constructive notice of memorandum and articles
Doctrine of indoor management
Review questions

LEARNING OBJECTIVES
After learning this chapter, you should be able to:
Explain the meaning and the purpose of articles of association
Describe the contents of articles of association
Explain the connection of and distinction flanked by articles and
memorandum
Explain the legal effects of the memorandum and articles
Explain the doctrines of constructive notice and indoor management ®
explain the procedure for alteration of articles of association.

MEANING AND PURPOSE OF ARTICLES

Section 2(2) of the Companies Act defines Articles as the Articles of Association of a
company as originally framed or as altered from time to time in pursuance of any previous
companies law or of this Act. This definition is not enough to explain its meaning.

The Articles of Association of a company are the rules and regulations relating to the 16
management of its internal affairs. They are similar to the 'partnership deed in a
partnership. The Memorandum defines the area beyond which the company cannot act while
the articles contain the rules and regulations for carrying out the business of the company.
Therefore „Articles‟ is subordinate to, and controlled through the 'Memorandum'.

The Articles embody the powers of directors, officers and of the shareholders as to voting
etc., the mode and the form in which the business of the company is to be accepted out and the
mode and the form in which the changes in the internal regulations can be made. The rights,
duties, and powers of the company vis-à-vis the members are incorporated in the Articles of
Associations. The Articles bind not only the existing members, but the future members of the
company also. Even the successors, legal representatives, or heirs of members are bound
through whatever is contained in the Articles. In information, the Articles bind the company
and the members as if they had been signed through each one of them.

Articles of Association is the foundation of contract flanked by the company arid the
members. Members have sure rights against the company. Also members have sure duties
towards the company. These rights and duties of members are given in the Articles. For
instance, a member is under an obligation to pay call money on his shares as and when the
directors of the company decide to create the calls in accordance with the procedure laid down
in the Articles of Association. If the member fails to create the payment, his shares may be
forfeited through the company in accordance with the procedure prescribed. On the other
hand, a member has a number of rights. For instance, he has a right to attend the meeting of
the Company and vote.

Further, Articles of Association of a company constitute a contract not only flanked by

members and the company; but members inter se also.

REGISTRATION OF ARTICLES
Section 26 of the Act requires that every private company, an unlimited company, and a
company limited through guarantee necessity have their own articles and it should be
registered beside with the memorandum. But a public company limited through shares need
not necessarily have its own articles. A public company limited through shares may either
have its own articles or it may adopt either wholly or partly Table a of Schedule I of the
Companies Act. Even if it does register Articles of its own, Table A will still apply
automatically unless it has been excluded or customized. In other words, there are three
possible alternatives in which a public company limited through shares may adopt Articles of
Association. These are:
It may adopt Table A in full; or
It may wholly exclude Table A and set out its own Articles in full; or
It may set out its own Articles and adopt part of Table A.

If such a company goes in for the first alternative, then it is not necessary to get any
Articles of Association registered. It has only to endorse on the face of the Memorandum of
Association, that it has adopted Table A as its Articles of Association.

You should note that the Articles of a private limited company necessity contain die three
restrictions as given in Section 3(1) (iii). The Articles of Association of an unlimited company
should state the number of members with which the company is to be registered and, if the
company has a share capital, the amount of share capital with which the company is to be
registered [Section 27 (1)].

In the case of a company limited through guarantee, the articles should state the number
of members with which the company is to be registered [Section 27 (2)]. The Articles of
Association necessity be printed, divided into paragraphs, numbered consecutively and signed
through each subscriber of the Memorandum of Association in the attendance of at least one
witness who shall attest the signature and shall likewise add his address, account and job, if
any [Section 30].

CONTENTS OF ARTICLES
You have learnt that the Articles of Association of a company contains the rules and
regulations for the internal management of the company.
The Articles of Association of a company should usually contain rules and regulations
relating to the following matters:
The exclusion, wholly or in part, of Table A, in the case of a public
company limited through shares. But other companies may, if they so
desire, contain the relevant provisions from Table A in their Articles of
Association.
Share capital—shares and their value and its division into equity and
preference shares, if any.
Rights of each class of shareholders and the procedure for difference of
their rights. Procedure relating to the allotment of shares, creation of
calls and forfeiture of shares. Augment, alteration and reduction of
share capital.
Transfer and transmission of shares.
Lien of the company on shares allotted to the members for the amount
unpaid in respect of such shares.
Appointment, remuneration, power, duties etc. of the directors and
officers of the company.
 Conversion of shares into stock.
Notice of the meetings, voting rights of members, quorum, poll, proxy,
etc.
Audit of Accounts, transfer of amount to the Reserves, declaration of
dividend, etc. Borrowing Powers of the company and the mode of
borrowing.
Adoption of preliminary contracts, if any.
Issue of share certificates.
Issue of share warrants.
Keeping of dissimilar Registers
Concerning winding up of the company.

The Articles of Association necessity be prepared cautiously and it necessity contain rules
in regard to all such matters which are required to be contained therein and which are
necessary for the smooth functioning of the company.

But you necessity keep in mind that the articles necessity not contain anything which is
against the provisions of the Companies Act or the Memorandum of Association. For instance,
the Articles necessity not contain a rule permitting the payment of dividend out of capital,
because according to Section 205 dividend can be paid only out of profits.

ALTERATION OF ARTICLES
You know that the Articles contain the rales and regulations for the internal management
of the company. A company has a statutory right to alter its Articles of Association. Section
31 of the Companies Act, 1956 empowers a company to alter or add to its Articles of
association. The articles can be altered through following the procedure laid down in the Act.

Section 31 of the Companies Act, gives that subject to the provisions of this Act and to
the circumstances contained in its Memorandum, a company may, through special resolution
alter its Articles. It may be noted that a company cannot deprive itself of its power to alter
Articles either through an agreement or through a provision to that effect in the Articles
themselves.

Though, no alteration made in the Articles which has the effect of converting a public
company into a private company shall have effect unless such alteration has been approved
through the Central Government [Provisos to Section 31 (1)]. Any alteration made in the
Articles of Association shall be as valid as if originally contained in the Articles [Section 31
(2)].

The Companies Act provides wide powers to the members of the company to alter its
Articles. Though, the alteration should be made bona fide for the benefit of the company as a
whole and not for the benefit of majority of the shareholders.

This power of alteration of Articles is subject to whatever is contained in the Companies

Act, 1956 or the company's Memorandum of Association. In other words, the Articles of
Association cannot be altered in such a method as to be contrary to whatever is given in the
Company's Act, or the company'; Memorandum of Association. For instance, the Companies
Act, 1956 prohibits a company from purchasing its own shares. Now, the company cannot
alter its Articles in such a method as to empower itself to purchase its own shares. Therefore,
there are sure limits within which the alteration of Articles can be accepted out.

Limitations on Power to Alter Articles

Though a company can alter its Articles at any time presently through passing a special
resolution, but a few restrictions are placed on such a power. These are:
The alteration in the Articles proposed to be made necessity not be in
disagreement with whatever is contained in Memorandum of
Association.
The alteration in the Articles necessity not be inconsistent with any
provisions of the Companies Act, 1956. For instance, Sections 106-107
deal with the procedure for difference of shareholder's rights. The
Articles cannot be altered so as to contain rules which are contrary to
the provisions in Sections 106-107 of the Companies Act, 1956.
The alteration in the Articles cannot be made in such a method as to
contain anything which is illegal either under the Companies Act, 1956
or any other law.
The alteration necessity be bonafide being made for the benefit of the
company as a whole. The following case of Allen v. Gold Reefs of
West Africa illustrates this point. In this case, the original Articles
gave the company a lien on all shares "not fully paid-up" for calls due
to the company. S was the only member holding some fully paid-up
shares, but he also owned money to the company for calls due on other
 shares. S died and his shares 'were inherited through his legal
representatives. The company, thereafter, altered its Articles enabling
the company to exercise lien on all shares—whether fully paid or not.
Now the question arose whether the company could exercise lien even
on fully paid-up shares.

It was held that the company could do so as it was done bona fide for the benefit of the
company as a whole.
An alteration which has the effect of compelling a member to take or
subscribe for more shares, or in any method raising his liability to
contribute to the share capital of the company is not binding on the
existing members, unless he has given his consent in writing (Section
38).
A company may pass a special resolution and convert the uncalled
capital into a reserve liability to be described up only at the time of
winding up (Section 99). But a reserve liability once created cannot be
unreserved but may be cancelled on reduction of capital.
No alteration in the Articles can be made so as to convert a public
company into a private company without the approval of the Central
Government (Section 31).
No alteration to the Articles can be made which would discriminate
flanked by the majority shareholders and the minority shareholders so
as to provide the former an advantage of which the latter have been
deprived.
No alteration can be made so as to enable the company to commit a
breach of contract with a third party. The company shall remain liable
for damages for its breach.
The alteration necessity not be inconsistent with an order of the court.
Such alterations can be made through the company only with the leave
of the court,

A copy of the special resolution authorizing the alteration necessity be filed with the
Registrar within 30 days of passing the said resolution. According to Section 40 of the Act,
alteration should be noted in every copy of the Articles of Association and the Articles of
association issued after the date of alteration should be in accordance with the alteration.

CONNECTION FLANKED BY MEMORANDUM AND

ARTICLES
The Memorandum of Association is a fundamental document of a company presently like
a constitution of a country. It is the main document as placed beside with Articles which is
subordinate to and is controlled through the Memorandum of Association.

The Articles cannot confer powers on the company other than those given in the
Memorandum of Association of the company. So, at the time of framing the Articles or
creation alteration in the Articles, it necessity be ensured that the original regulations or die
altered ones do not exceed powers of the company given through the Memorandum, nor
provide validity to any provision which is contrary to the Companies Act, 1956. For instance,
the Company's objects clause is divided into two parts and is given in the Memorandum of
Association. The objects given in the 'Other objects' can be started only after following the
procedure given in the Companies Act. In such a situation, the company cannot create a
provision in the Articles empowering the company to start business in the other objects clause
beside with the objects given in the 'main objects clause' at the time when the company is
incorporated.

The Memorandum is of interest to outsiders who wish to deal with the company, while
the articles are of interest mainly to the shareholders and directors.

DISTINCTION FLANKED BY MEMORANDUM AND

ARTICLES
The following are the main points of distinction flanked by the Memorandum and
Articles:
Memorandum of Association is the charter of the company. It lays
down the scope and powers of the company. In information,
Memorandum defines the area beyond which the Articles of
Association actions of the company cannot go. Inside that area the
shareholders may create such regulations for the governance of the
company as they think fit.
Memorandum of Association is a fundamental document. Articles of
Association are subordinate, to and are controlled through the
Memorandum of Association.
 The purpose of Memorandum is two fold:
To tell the intending purchaser of shares the scope of the behaviors of
the company and the. objects on which his money will be invested,
To tell those who deal with the company as to what the objects of the
company are so as to enable them to enter into only those contracts
with the company which are not ultra vires. The purpose of the of the
Articles of Association is to give rules and regulations for the internal
management of the company. Therefore, a company is not bound to an
outsider, but it is bound to a member through whatever is contained in
its Articles of Association.
Articles of Association is the foundation of a contract flanked by the
company and its members, Memorandum of Association usually
defines the relation flanked by the company and outsiders.
A public company limited through shares need not frame its own
Articles of Association. It may adopt Table A as its Articles. But every
company, without exception, necessity prepare its own Memorandum
of Association.
The clauses of the Memorandum cannot, be easily altered. The
company has to follow the striker procedure for the alteration of its
clauses. In some cases alteration requires the approval of the Company
Law Board or the Court. Whereas, Articles can be altered easily
through passing a special resolution.
Any act which is beyond the powers given in the Memorandum is ultra
vires and void and it cannot be ratified even through the whole body of
shareholders. But any act which is ultra vires the Articles may be
ratified through shareholders through passing a special resolution.

EFFECT OF MEMORANDUM AND ARTICLES

Section 36 gives that the Memorandum and Articles shall, when registered, bind the
company and the members thereof to the similar extent as if they respectively had been signed
through the company and through each member, and contained covenants on its and his part to
observe all the provisions of the Memorandum and of the Articles. Therefore, the
Memorandum and Articles constitute a binding contract flanked by the company and each of
its member. The legal effects can be studied under the following headings:
Members bound to Company: The memorandum and Articles
constitute a contract binding the members to the company. Each
member is bound through whatever is contained in them as if both
these documents were signed through him. In Boreland‟s Trustee v.
Steel Brothers and Co. Etd. case, the Articles of the company provided
that the shares of any member who became bankrupt would be sold to
other persons at a price fixed through the directors. B, a shareholder
became bankrupt and his trustee in bankruptcy claimed that he was not
bound through the articles and could so, sell those shares at their true
value. But it was held, that the trustee in bankruptcy was bound
through the Articles as it constituted a binding contract flanked by the
members and the company. Likewise in Bradford Banking Company v,
Brigs case where the Articles provided that the company shall have a
first charge on the shares for the debts due to it through members. One
of the members owing money to the company borrowed money from
the bank on the security of shares. The bank gave notice of deposit of
shares to the company. It was held that the company has priority in
excess of the shares. It is clear that company can sue its members for
the enforcement of the Articles and can restrain its members through
court, from violating any provisions contained therein.
Company bound to the Members: Since the Articles and
Memorandum constitute a contract binding the company to its
members, the company, in its turn, is also bound to the members
through whatever is contained in them. For instance, it necessity
confine its behaviors to the objects clause in the Memorandum. If it
proposes to enter into any ultra vires contract, any member of the
company can go to a Court and obtain an order of injunction
restraining the company from doing so. Likewise, the company is
bound to individual members in respect of their ordinary rights as
members. For instance, he can exercise his right to receive a share
certificate, the dividend warrant, notice for the meeting etc; to vote at
the meeting, to elect directors etc. according to the rules and
regulations given in the Articles.
 Member bound to Member: The Memorandum and Articles do not
constitute express contract flanked by the members of the company.
Yet each member is bound through these documents on the foundation
of an implied contract to the other members. The Articles regulate their
rights inter se. As flanked by members inter se, each member is bound
through the Articles and Memorandum to the other members. Though,
this right can be exercised through the company only except in some
exceptional cases. For instance, if a member has committed a breach of
the Articles, say, he has not paid his calls on his shares; another
member has no right to sue him. It is only the company which can sue
a defaulting member. Though, if a member holds a majority of the
shares of the company and does not allow ah action to be taken in the
name of the company, the complaining members are entitled to uphold
a suit in their own name against such a member provided the acts
complained are a fraud on the minority or are ultra vires the company.
The company is not bound to outsiders: The Articles of Association
do not constitute any contract flanked by the company and the
outsiders so, outsider cannot sue the company. An outsider is not
entitled to enforce the articles against the company for any breach of a
right that is conferred on him through the articles. Even if the name of
an outsider is mentioned in the Articles for any proposed business, the
company is not bound through it. The fallowing case of Eley v.
Positive Government Life Assurance Co. Ltd. illustrates this point.

The Articles of the company contained a provision that Eley would be the solicitor of the
company for life and would not be removed from office except for misconduct. Eley acted as
solicitor to the company and also became a member of the company. The company, though,
terminated his services. Thereupon, he sued the company for damages for breach of contract,
Held, the Articles cannot be the foundation of a contract flanked by the company and an
outsider. It would be noted here that he was trying to exercise his right as an employee and not
as a member. A person can be a member of the company and at the similar time may be a
creditor or employee of the company. In the case, he was trying to exercise his right as an
employee of the company. There was no self-governing contract flanked by the company and
Eley separately from whatever was contained in the Articles. So, his suit was dismissed.
CONSTRUCTIVE NOTICE OF MEMORANDUM AND
ARTICLES
You have learnt that for incorporating a company, the Memorandum and Articles of
Association are required to be registered with the Registrar of Companies. On registration, the
Memorandum and Articles of Association become public documents. These documents are
accessible for public inspection either in the Office of the company or in the office of the
Registrar on payment of one rupee for each inspection.

Every person who deals with the company, whether shareholder or an outsider, is
presumed to have read these documents and is deemed to know the contents of these
documents. This kind of presumed knowledge of these documents is termed the 'Constructive
Notice' of Memorandum and Articles of Association.

So, any person dealing with the company cannot argue that he has not read the
documents, such as Memorandum, of the company. For instance, if a person enters into a
contract with a company and supplies some material to the company, but the company refuses
to pay on the ground that this contract is ultra vires the company, then the supplier cannot, in
his defense, take the plea that he did not know the provisions of the Memorandum of
Association of the company.

Therefore if a person deals with a company which is not sheltered through these
documents, he cannot take the plea in a Court that he was unaware of the contents of the
Memorandum and Articles. He is presumed to have not only notice of these documents, but to
have read them and understood then according to their proper meaning. It is immaterial if he
has not even seen then

The doctrine of Constructive Notice is, though, customized through the doctrine of Indoor
Management.

DOCTRINE OF INDOOR MANAGEMENT

 The doctrine of indoor management is an exception to the rule of constructive notice. The
doctrine of indoor management imposes an significant limitation on the rule of constructive
notice. According to the rule of constructive notice, persons dealing with the company are
presumed to have read and understood the contents of these two documents. Once they are
satisfied that the company has got the power to enter into the proposed transaction, they are
required to do no more. They are not bound to enquire into the regularity of any internal
proceedings. They are entitled to assume that the provisions of the Articles of Association
have been complied with through the company. This doctrine seeks to protect the outsiders
against the company.

So, if a transaction appears to be within the powers of the company, then the company
cannot escape liability through showing that there was some irregularity in following the
procedure. A person can be presumed to know the constitution of the company, but not what
may or may not have taken lay within the doors that are closed to him. This doctrine is
recognized as the 'doctrine of indoor management' or the rule in Royal British Bank v.
Turquand. The facts of this case were as follows: The directors of a company were authorized
through the articles to borrow on bond such sums of money, as authorized from time to time,
through a resolution of the company, in Common Meeting. The directors borrowed money
from Turquand and issued a bond to him. No resolution of the company, as was required to be
passed according to the Articles of Association was passed. Held, Turquand could sue the
company on the bond, as he was entitled to assume that whatever was required to be done as
regards the internal management of the company was done. In other words, he was entitled to
assume that the resolution of the company in Common Meeting authorizing the directors to
borrow money on the foundation of bond had been passed. He was not duty-bound to inquire
whether the resolution had been actually passed or not. Though, he necessity have establish
out whether the company had the power to borrow or not, as that was the burden imposed
upon him through the doctrine of Constructive Notice.

Exceptions

The doctrine of indoor management is subject to the following limitations:

Knowledge of Irregularity: A person who has knowledge of an
irregularity concerning the internal management of the company
cannot claim protection provided through this doctrine. The knowledge
of irregularity may be actual or constructive. In this connection the
case of Howard v. Pokent Ivony Co. is relevant. The directors were
empowered to borrow money upto £ 1,000 and sanction of the
shareholders was required for an amount in excess of this. The
directors themselves lent to the company an amount in excess of the
borrowing powers without the consent of the shareholders. It was held
that the directors had the notice of the internal irregularity and so the
company was liable to them only for £ 1,000.
Negligence: If a person, who deals with the company, does not take
the trouble of reading these documents to discover out whether the
proposed transaction is within the scope of powers of the company or
not, he cannot claim any benefit under the doctrine of indoor
management.
Acts Beyond Apparent Authority: If an officer of the company does
something, which would not ordinarily be within his powers, the
person dealing with him necessity create proper inquiries and satisfy
himself as to the officer's authority. If he fails to create proper inquiry
in spite of suspicious circumstances, he cannot claim any protection
under the doctrine of indoor management. In Anand Bihari Lai v.
Dinshaw & Co.‟s, case the accountant of the company transferred
some property of the company to the plaintiff. The transfer was held
through the Court to be void, because the power to transfer property
could not be measured within the apparent authority of the accountant.
The plaintiff were put to suspicion as they should have enquired
thoroughly before entering into the transaction.
Forgery: The rule is not applicable when the document relied upon
through the outsiders turns out to be a forged one. A company is not
liable for forgeries committed through its Officer. In the case of Ruben
v. Great Fingal Consolidated Company, a share certificate was issued
through the Secretary of the company under the two forged signatures
of the directors as required through the articles. The holder of the share
certificate wanted to be registered as a member of the company, but the
company refused to accept him as a member of the company. The
share certificate holder's plea was that he had no means to discover out
the geniuses of the signatures, so, he should he protected. But it was
held that the doctrine of indoor management is not applicable to cases
of forgeries.
REVIEW QUESTIONS
What are Articles of Associations? How can they be altered?
"The power of altering Articles of Association is wide, yet it is subject
to a big number of limitations." Explain.
What are the usual contents of the Articles?
Explain the legal effect of the Articles of Association. How distant
they are binding on outsiders?
Explain briefly the relation flanked by Memorandum and Articles of
Association.
 CHAPTER 7

Prospectus

STRUCTURE
Learning Objectives
Meaning and Importance
Contents of Prospectus
Statement in lieu of Prospectus
Minimum Subscription
Misrepresentation in the Prospectus and its Consequences
Review Questions

LEARNING OBJECTIVES
After learning this chapter, you should be able to:
Explain the meaning and importance of prospectus
Describe the contents of prospectus
Explain the meaning of the statement in lieu of prospectus
Distinguish prospectus from a statement in lieu of prospectus describe
the concept of minimum subscription
Explain the effects of misstatements in the prospectus and the remedies
accessible.

MEANING AND IMPORTANCE

Section 2(36) of the Companies Act, 1956 defines a prospectus as any document
described or issued as a prospectus and comprises any notice, circular, advertisement or other
document inviting deposits from the public or inviting offers from the public for the
subscription or purchase of any shares in, or debentures of a body corporate.

In easy words, a prospectus may be defined as an invitation to the public to subscribe to

the shares or debentures of a company. You should note that any document inviting deposits
from the public shall now be treated as a prospectus.

You necessity keep in mind that a prospectus is: An offer through the company but it is
only an invitation to offer. A company, through issuing a prospectus to the public at big, is
inviting applications for the purchase of its shares or debentures. The persons who want to
purchase shares in the company would fill up the share application shapes and submit the
similar along with the share application money, This act of applicants amounts to creation
offers to the company to buy as several shares in the company as are mentioned in the share
application form. The Board of directors of the company will then create the allotment of
shares in response to the share application form. This act of the Board of directors amounts to
acceptance of the offer of the applicant to purchase shares. Therefore, a contract flanked by
the applicant and the company is made with all the contractual rights and obligations.

The definition of prospectus comprises any notice, circular, advertisement or other

document inviting deposits from the public. Therefore, the invitation of public deposits
through the companies is also regulated through the prospectus.

Meaning of Prospectus Issued to the Public

From the definition of prospectus, it necessity be clear to you that the invitation necessity
be made to the public. In Section 67 of the Act the term 'public' has been explained as follows:
It comprises any section of the public, whether selected as members or debenture holders of
the company concerned or as clients of the person issuing the prospectus or in any other
manner. Therefore, if a document inviting persons to buy shares or debentures is issued to any
section of the public, say to all the doctors or engineers or to all the clients of a scrupulous
share broker, it will amount to a prospectus. For deciding whether the invitation is made to the
public or not, the language of the notice and the facts of the scrupulous case has to be
measured. It is not the number of copies of the prospectus or the persons to whom it is issued,
is the deciding factor but the real test is as to who can apply for shares in response to the
invitation. A single private communication does not amount to an invitation to the public. This
is illustrated through the case of Nash v. Lynde.

A managing director of a company sent to his co-director many copies of a document

marked "strictly private and confidential” and containing particulars of a proposed issue of
shares, accompanied through share application shapes. One of the copies was sent through the
codirector to a solicitor, who in turn, gave it to a client who passed it on to a relation. The
allottee (relative of the client of the solicitor) filed a suit for compensation for the loss
sustained through him through cause of an omission in the document. It was held that the
document did not amount to "prospectus issued to the public", as it was marked "strictly
private and confidential".

A document is deemed to be issued to the public, if the invitation is such as to be open to

any one who brings his money and applies for shares in the company, whether the prospectus
was addressed to him or not. But if the invitation is capable of being accepted only through
those to whom it has been made, then it should not be regarded as to have been made to the
public. In Sherwell v. Combined Incandescent Mantles Syndicate, the invitation to subscribe
to the shares of the company was issued to a few friends of the directors; it was held not
amounting to an offer to the public.

CONTENTS OF PROSPECTUS
Section 55 gives that a prospectus issued through or- on behalf of a company, or in
relation to an planned company shall be dated, and that date necessity, unless contrary is
proved, be taken as the date of the publication of the prospectus.

Section 56 gives that a prospectus necessity (i) contain the matters specified in Part I of
Schedule Hand set out the reports specified in Part II of Schedule II of the Companies Act,
1956. The Third Part of the schedule is explanatory of Part I and II.

Matters to be Specified in the Prospectus

Part I of Schedule II enumerates the following matters to be specified in the Prospectus:

The main objects of the company.
The names, occupations, and addresses of the signatories to the
Memorandum of Association and the number of shares subscribed for
through them.
The number and classes of shares, if any.
The number redeemable preference shares planned to be issued, with
the date of redemption or, where no date is fixed, the era of notice
required for redeeming the shares; and the proposed method of
redemption.
The number of shares, if any, fixed through the articles, as the
qualification shares of a director.
The names, addresses, and occupations of the directors, the managing
director, or manager jointly with any provision in the articles or a
contract concerning their appointment, remuneration, or compensation
for loss of office.
The amount of minimum subscription on the receipt of which the
directors may proceed to allot shares; ii) the time of the opening and
closing of the subscription list; the amount payable on application and
allotment on each shares; iv) 'If any allotment was previously made
within the two preceding years, the details of the shares allotted and
the amount, if any paid thereon.
The substance of any contract or arrangement giving to any person
(such as a promoter) any option or preferential right to subscribe for
any share in, or debentures of a company; jointly with the amounts
payable and the era throughout which option is to be exercised through
such persons, whose names, occupations and addresses necessity also
be given.
particulars of shares or debentures which, within the two preceding
years, had been issued for consideration other than cash, and the
amount of consideration for which they were issued.
The amount payable as premium on each share to be issued, stating the
proposed date of issue; and where some shares of the similar class are
to be issued at dissimilar premiums or at par, or at a discount and
others at a premium, the reasons for the differentiation.
Where the issue of shares or debentures is underwritten, the names of
the underwriters, if any, arid the opinion of the directors that
possessions of underwriters are enough to discharge their underwriting
obligations.
The names, occupations and addresses of vendors from whom the
company has acquired any property, and the amount paid or payable in
cash, shares or debentures to the vendors.
The names, descriptions, addresses and occupations of each person
(including promoter or officer of the company) to whom any amount
as commission for (i) subscribing or agreeing to subscribe for any
shares or debentures or (ii) underwriting them is paid within the
preceding two years jointly with the amount paid and the rate of
underwriting commission as well as any benefit paid or payable to the
promoter or officer.
The amount or estimated amount of preliminary expenses and. the
names of persons through whom any of those expenses have been paid
or are payable.
Any amount or benefit paid or given within the two preceding years or
planned to be paid or given to any promoter or officer and the
consideration for the payment of the given benefit.
The dates of, parties to, and common nature of every contract
appointing or fixing the remuneration of a managing director, or
manager whenever entered into.
The names and addresses of the auditors, if any, of the company.
Full particulars of the nature and extent of the interest, if any, of every
director or promoter i) in the promotion of the company, or ii) in any
property acquired through the company within two years of the issue
of the prospectus.
If the share capital of the company is divided into dissimilar classes of
shares, voting rights and rights to dividend and the right as to capital
attached to the many classes of
Where the articles have imposed restrictions (a) upon the members of
the company in respect of i) the right to attend, speak or vote in
meetings of the company or ii) the right to transfer shares or (b) upon
the directors of the company in respect of powers of management, the
nature and extent of those restrictions.
In the case of an existing company, the length of time throughout
which the company has accepted on the business. If the company
proposes to acquire a business, which has been accepted on for less
than three years, the length of time throughout which the business has
been accepted on.
If any reserves or profits of the company or any of its subsidiaries have
been capitalized, particulars of the capitalization and particulars
of any surplus arising from revaluation of assets throughout the
preceding two years and the manner such surplus has been dealt with.
In case the company had been in business, the statement of the auditors
concerning profits and losses, and assets and liabilities, jointly with the
 rate of dividends paid, for five financial years immediately preceding
the issue of the prospectus, giving particulars of each class of shares on
which such dividends have been paid for any of those years.
A reasonable time and lay at which copies of all balance sheets and
profit and loss accounts, if any on which the statement of auditors is
based, may be inspected.
The name(s) of the stock swap or stock exchanges to which application
has been made for permission to deal in and for official quotation for
the shares and debentures offered thereby.

The prospectus necessity contain a blank application form whereby it necessity be printed
prominently that no application should be made in the name of a fictitious person. It should
also be stated that applications necessity be made in single name only and not in joint names.

Reports to be Set Out in the Prospectus

In addition to the matters, Part II of the Schedule requires the following statement to be
set out in the prospectus:
An auditor's statement showing i) profits or losses in each of the last
five years, ii) assets and liabilities at the date of the last accounts, iii)
the rates of dividend paid through the company in respect of each class
of shares throughout the preceding five financial years, and similar
details with regard to subsidiary companies, if any.
If the company proposes to acquire any business, a statement should be
made through a Chartered Accountant, whose name should be
disclosed, upon i) the profits and losses of the business, ii) and assets
and liabilities of the business, for the preceding five years
If the proceeds, or any part of the proceeds, of the issue of the shares or
debentures are or is to be applied directly or indirectly in the purchase
of any business, then a statement similar to the one in (2) above is
required to be set up.
Registration of Prospectus with Registrar of Companies

Section 60 requires that a copy of the prospectus duly signed through every director or
proposed director necessity be delivered to the Registrar of Companies before the date of its
publication. Every copy of the prospectus, on its face, necessity state that a copy of the
prospectus has been delivered to the Registrar of Companies. The prospectus necessity be
issued within ninety days after the date on which a copy of the similar is delivered to the
Registrar. If it is issued after ninety days after its registration, it shall be deemed to be a
prospectus a copy of which has not been delivered to the Registrar.

Further, the copy of the prospectus necessity have endorsed on, or attached to it the
following documents; the consent of the expert to the issue of the prospectus, if his statement
has been incorporated therein and such expert necessity not be linked or interested in the
formation, promotion or management of the company.
A copy of every contract appointing or fixing the remuneration of a
managing director or manager.
A copy of every material contract unless it is entered into in the
ordinary course of business within two years before the date of issue of
the prospectus.
When the persons creation the reports relating to profits and losses,
assets and liabilities etc. In respect of a business proposed to be
acquired have made adjustments to them, a signed statement through
them stating the adjustments and the reasons for the similar.
The consent in writing of the person if any named in the prospectus as
the auditor, adviser, attorney, solicitor, banker of the company to act in
that capability.
Consent of director or directors, named in the articles or prospectus, to
act as such directors of the company.
A copy of the underwriting agreement, if any.
STATEMENT IN LIEU OF PROSPECTUS
A public company may not invite the public to subscribe to its share capital. Instead, it
may arrange capital masterly. In such a situation, it is required through Section 70 to submit
statement in lieu of prospectus with the Registrar of Companies, at least three days before it
can create any allotment of shares or debentures. Schedule III of the Companies Act, 1956
contains a model form of Statement in lieu of prospectus in pursuance of Section 70.

Likewise, when a private company is converted into a public company in pursuance of

Section 44 it may issue a prospectus inviting public to subscribe to its share capital, in case it
wants to raise extra money. Though, if it is not issuing a prospectus, then it is under an
obligation to submit a statement in lieu of prospectus. Schedule IV to the Companies Act,
1956 contains a model form of a statement in lieu of prospectus when a private company is
converted into a public company in pursuance of Section 44.

After going through Schedules III and IV to the Companies Act, 1956 one discovers that
the contents thereof are approximately similar to the ones in the prospectus.

If allotment of shares or debentures is made through a company without filing the

statement in lieu of prospectus with the Registrar of Companies, the allotted may avoid the
allotment within two months after the statutory meeting is held or where the allotment is being
made after the holding of the statutory meeting. then within two months of the date of
allotment. If a statement in lieu of prospectus containing the requisite particulars and
statement is not filed with the Registrar of Companies, where it is required to be filed, then the
company and every director shall be liable to a fine upto Rs. 1000.

MINIMUM SUBSCRIPTION
Minimum subscription is the minimum amount equivalent to which the share applications
necessity be received through the company. Otherwise application money becomes refundable
to the applicants in accordance with Section 69. The amount of minimum subscription is
required to be given in the prospectus and it necessity be subscribed or applied for within 120
days of the issue of the prospectus before the lust allotment of shares can be made.

The directors of the company or the signatories to the Memorandum of Association

decide the amount of the minimum subscription. It is the amount, which in their opinion,
necessity be raised through the issue of shares to give in respect of each of the following heads
and distinguishing the amount required under each head:
The purchase price of any property bought or to be bought which is to
be defrayed in whole or in part out of the proceeds of the issue;
 Any preliminary expenses payable through the company including any
commission, underwriting or otherwise for subscription of shares in the
company;
The repayment of any moneys borrowed through the company in
respect of any of the foregoing matters;
The working capital; and
Any other expenditure, stating the nature and purpose thereof and the
estimated amount in each case.

If the company has not received minimum subscription, and it has not been able to allot
any shares within 120 days after the first issue of the prospectus, it necessity forthwith refund
within after that ten days without any interest all money received from the applicants. If the
money is not repaid within 130 days of the issue of the prospectus, the directors of the
company shall be jointly and severally liable to repay that money with interest at the rate of 6
per cent per annum from the expiration of the 130th day. But a director, who can prove that
the default in repayment was not due to any misconduct or negligence on his part, may escape
liability.

MISREPRESENTATION IN THE PROSPECTUS AND ITS

CONSEQUENCES
You have learnt that the investors apply for shares or debentures of a company an the
foundation of information given in the prospectus. The prospective buyer of shares is entitled
to all true disclosures in the prospectus. A prospectus necessity, so, tell the truth, the whole
truth and nothing but the truth. The prospectus necessity provide a true picture of the
company. So, if there are untrue statements in the prospectus. The allottees have sure remedies
against the company and the persons issuing the prospectus. Though, these remedies are not
accessible to a buyer of shares in the open market or ii) to a subscriber to the Memorandum of
Association.

You should note that not only there should be no untrue statements in the prospectus;
there should also be no concealment or omission of material facts from the prospectus. The
following case of Rex v. Kylsant illustrates this point.

A company issued a prospectus which did not contain any untrue statements. One of the
statements disclosed the rates of dividends paid for a number of years. This was a factual
statement which was true. But the dividends had not been paid out of trading profits but out of
realized capital profits. This information was not disclosed in the prospectus, Held, that the
nondisclosure of the information that dividends were not distributed out of trading profits but
out of realized capital profits is a very significant statement the omission of which provides a
right to the allottees of shares to avoid allotment and resort to other remedies accessible under
the Companies Act.

If there is any omission in the prospectus calculated to mislead the public, it shall be
Prospectus measured to be untrue. In Peek v. Gurney case the prospectus issued did not
mention in relation to the sure liabilities. This created a false impression in relation to the
company being very wealthy. The prospectus was held to be untrue.

An allottee of shares, who had applied for shares, on the faith of a prospectus i)
containing nature statements or ii) omitting material facts, has remedies against the company,
its promoters and directors and experts.

It should be noted cautiously that the right to claim compensation for any loss or damage
is accessible only to a person who has 'subscribed' for shares or debentures on the faith of the
prospectus containing untrue statements. Therefore, a subsequent buyer of shares in the open
market has no remedy against the company or the directors or promoters.

Remedies against the Company

Person who has bought shares from the company relying on the statements in the
prospectus, map (i) avoid the contract to purchase shares, and (ii) claim damages if he can
illustrate that there is a misstatement in, or omission of material information from, the
prospectus. Further he has to illustrate that the misstatement or omission was i) one of
information and not of law nor a mere expression of opinion; ii) material and iii) actually
relied upon through him.
Rescission of contract: In case he wants to avoid the contract to
purchase shares, he necessity do so i) within a reasonable time after the
allotment of shares; ii) before proceeding's to wind up the company
have commenced and iii) before he does anything which is incenses
tent with the right to avoid the contract e.g. he tries to sell the shares or
attends a common meeting of the company or accepts dividends.
Damages for fraud: The second right of allottee, in case of
misstatements in or omission of material facts from the prospectus is to
sue the company for damages for fraud. The company could be held
liable only when it is proved that such a prospectus was issued through
 the company or through some one authorized through the company. In
order to succeed, the allottee necessity, in addition to the three
circumstances given in (a) above, prove that those acting on behalf of
the company acted fraudulently, ii) that those purporting to act on
behalf of the company were authorized to act on its behalf; and iii) that
he has suffered a loss or a damage.

It is worth remembering that the allottee of shares can not both retain the shares and get
damages from the company.

Remedies against Promoters and Directors of the Company

Section 62 gives that where a prospectus is issued inviting persons to subscribe for shares
in or debentures of a Company, the following persons shall be liable to compensate all those
who subscribe for shares on the faith of the prospectus for any loss sustained through them
through, cause of any untrue and misleading statement incorporated in the prospectus.
Every person who is a director of the Company at the time of the issue
of the prospectus;
Every person who has authorized himself to be named and is named in
the prospectus as a director or as one having agreed to become a
director, either immediately, or after an interval of time;
Every promoter of the company; and
Every person (including an expert) who has authorized the issue of the
prospectus. But an expert is liable only in respect of his own untrue
statements incorporated in the statement made through him and
incorporated in the prospectus.

An allottee of shares may also bring an action for fraud i.e., for fraudulent mis-
representations incorporated in the prospectus either against the company or the directors. If
he decides to sue directors he need not receive the contract.

Defenses Accessible: A promoter, director or anyone else responsible

for issue of the prospectus (other than an expert) may escape liability,
if he can prove any of the following:
 That he withdrew his consent to act as director before the issue of the
prospectus and that it was issued without his authority or consent; or
That the prospectus was issued without his knowledge or consent, and
on becoming aware of its issue, he gave reasonable public notice of
that information; or
That he withdrew his consent after the issue of the prospectus but
before allotment and gave a reasonable public notice of the
withdrawal; or
That he had reasonable ground to consider that the statements made
were true and he honestly whispered them to be true; or
The statement was correct and a fair summary or a copy of an expert's
statement; or
The statement was made through an official or is an official document.

Remedies Against Experts

You have noted that several a times statements of experts are incorporated in a
prospectus. The term 'expert' comprises an engineer, a valuer, an accountant, and any other
person whose profession provides authority to-a statement made through him.

An expert is liable for in damages in respect of his own untrue statement, wrong
statement or valuation made through him and incorporated in the prospectus. Also he is liable
to pay compensation under Section 62. Though he shall not be liable if he proves that:
Having given his consent, he withdrew it in writing before delivery of
a copy of the prospectus for registration with the Registrar of
Companies; or
After delivery of prospectus for registration with the Registrar of
Companies and before allotment, he on becoming aware of the untrue
statement, withdrew his consent in writing, and gave reasonable public
notice of the withdrawal and his reasons so; or
He was competent to create the statement, and whispered on
reasonable grounds that it was true.
Criminal Liability for Misstatements in the Prospectus

Section 63 of the Act also gives for criminal liability for misstatements. It gives that
where a prospectus contains a misstatement, every person who authorized the issue of the
prospectus shall be punishable with imprisonment for a ten which may extend to two years, or
fine which may extend up to five thousand rupees, or with both, unless he proves
That the statement was immaterial, or
That he had reasonable ground to consider and did up to the time of the
issue of the prospectus consider that the statement was true.

Though, Section 63(2) exempts experts from liability under this section. The Act has also
laid down penalty for fraudulently inducing persons to invest money. According to Section 68,
any person who knowingly or recklessly creates any statement, promise or forecast which is
false, deceptive or misleading, or dishonestly conceals material facts so as to induce or
attempts to induce another person to subscribe to the shares of a company, shall be punishable
with imprisonment for a term which may extend to five years, or with fine which may extend
to ten thousand rupees, or with both,

REVIEW QUESTIONS
Describe the term prospectus.
What is the purpose of a prospectus?
Enumerate some of the particulars which are required to be
incorporated in a prospectus.
What do you mean through “issued to the public"? Illustrate your
answer.
What is a “statement in lieu of prospectus” ?
 PART 3. CAPITAL AND MANAGEMENT

CHAPTER 8

Share and Loan Capital

STRUCTURE
Learning objectives
Meaning and Kinds of Share Capital
Meaning and Kinds of Shares
Meaning of Stock
Meaning and Kinds of Debentures
Variation Flanked by Shares and Debentures
Public Deposits
Review Questions

LEARNING OBJECTIVES
After learning this chapter, you should be able to:
Explain the meaning of shares and kinds of shares
Describe the kinds of capital
Distinguish flanked by shares and stock
Explain the meaning of debenture
Classify debentures
Distinguish flanked by shares and debentures
Explain the meaning of the term 'deposits'
List the rules concerning acceptance of deposits through companies.

MEANING AND KINDS OF SHARE CAPITAL

You know that to carry on any business, some money is needed. The term 'capital' usually
means a scrupulous amount of money with which a business is started. In the case of a
company where big amount of money is required, it is raised through the issue of shares. The
amount so raised is described the 'share capital' of the company.

A company limited through shares should state its amount of share capital in the
memorandum of association. The capital clause of the memorandum of association also states
the amount of capital and this amount is divided into specified number of shares of a fixed
amount. For instance, the share capital of a company may be divided into shares of Rs. 10
each. The persons contributing towards the share capital are recognized as 'shareholders'. You
should note that the money borrowed through the company through issuing debentures, is not
part of the share capital of the company. It is in the form of a extensive-term loan to the
company.

In view of the stages involved in collecting the money on shares, the share capital of a
company may be classified as follows:
Nominal or Authorized Capital: It refers to the amount stated in the
memorandum of association as the capital of the company with which
it is to be registered. This is the maximum amount of capital which a
company is authorized to raise through issuing the shares. This is also
recognized as 'registered capital', as this is the amount of capital with
which the company is registered. This amount is divided into shares of
a fixed amount. The amount of nominal capital is determined on the
foundation of present and future capital needs of the company. It can
be increased or decreased through adopting the prescribed legal
procedure.
Issued Capital: It is that part of the authorized capital which is issued
to the public for subscription, It is not necessary for a company to issue
all the nominal capital in the beginning itself. In information, the term
'issued capital' means that part of the share capital which has been
actually issued or allotted through the company. So, the issued capital
can never be more than the authorized capital. It can at the mainly be
equal to the nominal capital. The balance of nominal capital remaining
to be issued is described 'unissued capital'.
Subscribed Capital: It is that part of the issued capital which has been
actually subscribed through the public. In other words, it is that part of
issued capital for which the applications have been received from the
public and shares allotted to them. The amount of subscribed capital,
so, cannot exceed the amount of issued capital. This is so, because the
company cannot accept for subscription an amount greater than the
issued amount. Where the shares issued for subscription are wholly
subscribed, issued capital will be the similar as the subscribed capital.
 This distinction flanked by the issued and subscribed capital is only
relevant from the accountants paint of view. The law does not
recognize this variation and uses the two in the similar sense'.
Described-up Capital: It is that part of nominal value of issued capital
which has been described-up or demanded on the shares through the
company. Normally, a company does not collect the full amount on
shares it has allotted. It collects it in installments recognized as
application money, allotment money, first call, second call and soon,
The .amount of installments which have been demanded for the time
being are termed as „alled-up capital' and the amount not yet demanded
is termed as 'uncalled capital' and the shareholders continue to be liable
to pay this amount as and when described.
Paid-up Capital: It is that part of the described-up capital which has
actually been received from the shareholders. For instance, a company
has described-up Rs. 5 lakhs, but it has actually received Rs. 4, 90,000,
then Rs. 4, 90,000 is the paid-up capital of the company. The amount
not paid in respect of allotment and calls made is recognized as 'calls in
arrears'. In the instance, Rs. 10,000 is the amount of calls in arrears. In
case there are no calls in arrears, the paid-up capital will be the similar
as‟ the described-up capital.
Reserve Capital: That part of the uncalled capital of a company which
it has decided, through special resolution, not to call except in the
event, and for the purpose of the winding up of the company, is
described the 'reserve capital'. The company cannot demand such
uncalled amount throughout its life-time. The reserve capital cannot be
turned into equity capital without the permission of the court and
cannot be cancelled at the time of reduction of capital. It is
accessible only for the creditors on winding up of the company.

MEANING AND KINDS OF SHARES

Meaning of a Share

You learnt that the capital of the company is divided into dissimilar units of a fixed
amount. Each of such unit is described a 'share'. Section-2(46) of the Companies Act defines a
share, "as a share in the share capital of the company, and comprises stock except where a
distinction flanked by stock and shares is expressed or implied." This definition is easy but is
not exhaustive as it fails to bring out the true nature of a share.

In Boreland‟s Trustee v. Steel Bros., Justice Farewell defined the share as, "a share is the
interest of shareholder in the company, measured through a sum of money for the purpose of
liability and dividends in the first lay, and of interest in the second, and also consisting of a
series of contracts entered into through all the shareholders inter se in accordance with the
provisions of the Companies Act and articles of association." Therefore, a share is not a sum
of money, but is an interest measured through sum of money and made up of several rights
contained in the contract.

In the Commissioner of Income Tax v. Average Vacuume Oil Company, the Supreme
Court of India defined a share therefore “Through a share in the company is meant not any
sum of money but an interest measured through a sum of money and made up of diverse rights
conferred on its holders through the articles of the company which constitute a contract
flanked by him and the company."

A share carries along with it sure rights and liabilities in the company. The rights of a
shareholder are proportionate to the number of shares held through him in the company. The
holder of a share is issued a share certificate which shows that the holder thereof has a
proportionate share or interest in the capital of the company. The share certificate identifies
the number of shares held through any shareholder.

A share in a company is a chose-in-action, which means that the property is not in the
immediate physical possession of the person, but he has a right to the property which can be
enforced through legal action. A share is also regarded as goods under Section 2(7) of the Sale
of Goods Act. Section 82 of the Companies Act gives that the share is a movable property
transferable in the manner provided through the articles of the company. But you necessity
note that the share is not a movable property in the similar method in which a bale of cloth or
a bag of wheat is a movable property. Therefore shares cannot be transferred through mere
delivery as in the case of movable property. You should also keep in mind that a share
certificate, though it can be transferred to another person, is not a negotiable instrument.

Kinds of Shares

According to Section 86 of the Companies Act, 1956, the share Capital of a company
limited through shares shaped after the commencement of the Act of 1956, or issued after
such commencement shall be of two kinds, namely, (a) preference share capital and (b) Equity
share capital. Therefore a public limited company can issue only two kinds of shares (a)
Equity shares and (b) preference shares.

Equity Shares
All shares which are not preference shares are 'equity shares'. These shares carry no
special privileges arid their rights and liabilities are governed through the articles of
association of the company. In the eyes of law, equity shareholders are not the owners of the
company, because a company has its own self-governing legal entity. Dividend is paid to the
holders of these shares after the preference dividend at a fixed rate has been paid. The rate of
dividend payable on these shares is not fixed and keeps on changing from year to year
depending on the amount of profits accessible for sharing. On the liquidation of the company,
the claims of equity shareholders are satisfied only after satisfying all other claims. Equity
shareholders have a right to vote on several resolutions in proportion to his share of the paid-
up equity capital, whereas preference shareholders have, usually, no voting rights.

Preference Shares

Under Section 85(1) of the Companies Act, a preference share is one

which fulfils the following two circumstances:
With respect of dividend, it carries a preferential right to be paid a
fixed amount or an amount calculated at a fixed rate.
With respect of capital, it carries a preferential right to be repaid the
amount of the capital paid-up in the event of winding up of the
company. In other words the amount paid on preference shares
necessity be paid back before anything is paid to the equity
shareholders.

The two circumstances clearly illustrate that the preference shares carry a preferential
right to receive dividend. Though, the amount or rate of dividend is fixed. Likewise, at the
time of winding up of the company, the preference shareholders are paid their amount prior to
the payment to equity shareholders.

Kinds of Preference Shares

The preference shares may be of the following kinds:
Cumulative Preference Shares: These shares are entitled to dividend
at a fixed rate whether there are profits or no profits. If in a scrupulous
year due to inadequate amount of profits, the dividend could not be
paid, then the unpaid dividend shall be accepted forward to the
subsequent years and shall be paid in the succeeding year out of the
profits along with the fixed dividends for that year. Since the dividends
can be accumulated, they are described 'cumulative preference shares'.
In the case of such shares the dividend keeps on accumulating until it
is fully paid. You should note that all preference shares are presumed
to be cumulative unless expressly stated in the articles to be non-
cumulative.
Non-Cumulative Preference Shares: These are the shares on which
the dividend does not go on accumulating. If in a scrupulous year there
are no profits or profits inadequate, the shareholders shall not get
anything or receive a partial dividend and they cannot claim the arrears
of dividends in the subsequent year. In easy words, on such shares the
unpaid dividends do not accumulate but lapse, i.e., the shareholders
lose them forever.
Participating Preference Shares: The holders of such shares are
entitled to receive dividend at a fixed rate and, in addition, they have a
right to participate in the surplus profits beside with equity
shareholders after divided at ascertain rats has been paid to equity
shareholders. In the event of winding up, if after "paying back both the
preference and equity shareholders, there are surplus assets, then the
holders of such shares shall be entitled to share in the surplus assets as
well. Such shares can be issued only if there is a clear provision in the
memorandum or articles of association or the conditions of issue.
Non-Participating Preference Shares: The holders of such shares are
entitled to only a fixed rate of dividend and do not participate further in
the surplus profits. If the articles are silent, all preference shares are
deemed to be non-participating.
Convertible Preference Shares: The holders of such shares have a
right to convert these shares into equity shares within a sure era.
Non-convertible Preference Share: The preference shares, where the
holders have no right to convert their shares into equity shares are
recognized as non-convertible preference shares.
Redeemable Preference Shares: Ordinarily, the amounts received
through the company on shares is not returned except on the winding
up of the company. A company limited through shares, if authorized
through its articles, may issue preference shares which are to be
redeemed or repaid after a sure fixed era. Therefore, the amounts
received on such shares-can be returned throughout the life-time of the
company. Such shares are termed as redeemable preference shares.
Under Section 80 of the Companies Act, a company may issue such
shares subject to the following circumstances:
Only such shares shall be redeemed which are fully paid-up.
Such shares shall be redeemed only out of the profits of the company
accessible for dividends or out of the proceeds of a fresh issue of
shares issued for this specific purpose.
If premium is payable on redemption, it should be provided for out of
the profits or out of company's share premium account, before the
shares are redeemed.
In case the shares are redeemed out of profits, then an amount equal
to the amount payable on redemption should be transferred to a
Capital Redemption Reserve Account.
The Amendment Act of 1988 introduced a new Section 80-A,
(effective from 15.6.1988) which gives for compulsory redemption
of all unredeemed preference shares within five years from the
commencement of the Amendment Act of 1988. According to
Section 80(5-A) of the Amendment Act of 1988, no company can
issue (after 15.6.1988) irredeemable preference shares or which are
redeemable after the expiry of ten years from the date of its issue.
Therefore , now onwards, a company can issue only redeemable
preference shares which are redeemable within ten years of its
issue. You should, though, keep in mind that the redemption of
preference shares should not be measured as reduction in the
 amount of authorised capital of the company.

Irredeemable Preference Shares: Such shares constitute permanent

capital of the company. The amount of such -shares cannot be
refunded before the winding up of the company. The Amendment
Act of 1988 has prohibited the issue of such shares. All existing
irredeemable preference shares necessity be. redeemed within five-
years from 15.6.1988 and if they are not redeemable before the
expiry often years from the date of issue, then such shares necessity
be redeemed as per the conditions of issue or within a era of ten
years from the commencement of the Amendment Act, 1988,
whichever is earlier.
Cumulative Convertible Preference (CCP) Shares: These shares
were introduced through the Government of India through a
notification issued in 1985. These shares can be issued to raise
finance for new projects, for expansion, diversification, and
modernization and also to meet the needs of working capital. The
face value of such shares shall ordinarily be Rs. 100 and the rate of
dividend shall be 10 per cent. These shares can be issued to the
extent of issued equity shares. These shares are to be compulsorily
converted into equity shares after the end of three years and before
the end of five years.

MEANING OF STOCK
Stock is the aggregate consolidated holdings of the share capital of
person. In easy words, it means a number of shares put jointly in a bundle.
The stock is expressed in conditions of money and not as so several shares.
Stock can be split into fractions of any amount without regard to the original
face value of the share. The main advantage of stock is that the shareholder
can transfer any portion of it as he likes.

You have learnt in Section 2(46) of the Act that a share comprises stock except where a
distinction is planned. Therefore, a company, if authorized through its articles, can convert its
fully paid-up shares into stock through passing an ordinary resolution. From this it should be
clear to you that a company cannot create an original issue of the stock. When the shares are
converted into stock, the company necessity provide a notice to the Registrar of such
conversion within thirty days of doing so. On conversion of shares into stock, the register of
members necessity illustrate the amount of stock held through each member instead of that
amount of shares. For instance, a member may be holding one thousand equity shares' of Rs.
10 each, fully paid-up. When these shares are converted into stock, he becomes the
stockholder owning Rs. 10,000 worth of stock.

Conversion of shares into stock does not alter the connection flanked by the holder and
the company, the stockholder still remnants a member. The holders of stock shall
have the similar rights as regards dividends, voting at meetings of the company as if they held
the shares from which the stock arose. The stock is also transferable like shares. You should
note that stock can also be reconverted into fully paid-up shares through an ordinary
resolution.

Distinction Flanked by Share and Stock: Stock possesses all the characteristics of a share,
but there are several points of variation flanked by the two. These are as follows:

MEANING AND KINDS OF DEBENTURES

Meaning and Features

The mainly general form of raising loan from the public is through issue of debentures. A
certificate issued through the company under i seal acknowledging a doht due through it to its
holder, is recognized as debenture, The necessity essential characteristic of a debenture is the
admission or record of indebtedness. According to Chitty, J. “debenture means a document
which either makes a debt acknowledges it, and any document which fulfils either of these
circumstances is a debenture." Section 2( 12) of the Companies Act states that a debenture
comprises debenture stock, bonds and my other securities of the company whether
constituting a charge on the Company's assets or not‟. In easy words, it means a document
which cither makes a debt or acknowledges it. A debenture contains the conditions and
circumstances of its issue, It may also be stated in the debenture that the company shall pay
buck the money to a specified date and till that date, interest at a fixed rate shall be paid to the
debenture holders. A debenture usually carries a charge or mortgage on the assets of the
company, hut it may be without a charge as well because debentures may be unsecured.

From the explanation of the term ‟debenture‟, the main features of a debenture can be
summarized as follows:
A debenture is in the form of a certificate issued under the seal of the
company. Though, the seal of the company is not necessary for the
validity of a debenture.
This certificate is an acknowledgement of debt through the company to
its holder.
A debenture usually gives for the repayment of a specified principal
sum on a specified date. Though, there is no restriction on the issue of
irredeemable debentures.
It usually gives for the payment of interest at regular intervals at fixed
dates until the principal amount is totally paid back.
Usually a debenture contains a charge on the assets of the company.
Such a charge may either be a fixed charge or a floating charge.
Though, a debenture may also be issued without any charge on
company's assets.
Debenture certificates are freely transferable presently like shares.
Debentures arc usually issued in series hut even a single debenture
issued to one person is quite valid.
A debenture holder has no right to vote at any meeting of the company.
Kinds of Debentures

A company can issue several kinds of debentures which can be classified on the
foundation of security, permanence convertibility, and records.
Registered arid Bearer Debentures: Registered debentures are made
out in the name of a scrupulous person, whose name is recorded in the
company's register of debentures. The name of the debenture holder
appears in the debenture certificate. Such debentures are transferable in
the similar manner as shares through transfer deeds. Interest on such
debentures is payable to the person whose name is registered with the
company in the register of debenture holders. Bearer debentures are
those which are payable to the bearer (i.e. the holder of the debenture).
The company keeps no register of such debenture holders. Like
negotiable instruments, bearer debentures are transferable through
mere delivery. Interest on such debentures is payable on the foundation
of coupons attached with the debenture certificate.
Secured and Unsecured Debentures: Secured debentures are those
debentures which are secured either through the mortgage of a
scrupulous asset of the company recognized as 'Fixed Charge' or
through the mortgage of common assets of the company recognized as
„Floating Charge‟. Secured debentures are also recognized as
„Mortgage debentures'. Unsecured debentures, on the other hand arc
those debentures which arc not secured through any charge or
mortgage on any property of the company. Unsecured debentures arc
also recognized as „Naked debentures‟. The debenture holders of such
debentures arc the unsecured creditors of the company. Only good
companies of strong financial standing can issue such naked
debentures.
Redeemable and Irredeemable Debentures: Redeemable debentures
means such debentures which arc repayable after a specified era. A
redeemed debenture may be re-issued until it is cancelled. Upon the re-
issue of redeemed debentures, the debenture holders will continue to
 have the similar rights and privileges as if the debentures had never
been redeemed. Irredeemable debentures, on the other hand, are those
debentures for which no fixed date is specified for repayment and the
holders of which cannot compel the company to redeem them as
extensive as the company is functioning and docs not create default in
interest payment. Irredeemable debentures arc also recognized as
perpetual debentures. It should be noted that whether debentures are
redeemable or irredeemable, they become immediately payable when
the company goes into liquidation. Normally companies issue
redeemable debentures.
Convertible and Non-Convertible Debentures: Convertible debentures
are those wherein the debenture holder is given an option to convert
their debentures into equity shares in the company at a stated rate of
swap on the expiry of a specified era. On conversion, the debenture
holders become the members of the company, Non-convertible
debentures, on the other hand, are those debentures for which the
debenture holder does not have any right for conversion into equity
shares.

VARIATION FLANKED BY SHARES AND DEBENTURES

You have learnt that presently as shares arc uniform parts of the share capital debentures
are uniform part of the loan capital of a company, But it is necessary to distinguish flanked by
a share and a debenture because the rights and privileges as also the liabilities accompanying
these instruments are very much dissimilar from one another. The main points of variation are
as follows:
Shareholders are owners of the company whereas the debenture
holders are creditors of the company. So, while the shareholders have a
multi-faceted interest in the welfare of the company, the debenture
holders have a very limited interest (limited to getting interest on time)
in the company.
A shareholder enjoys the rights of proprietorship of a company
whereas a. debenture holder can enjoy the rights of a lender only.
A shareholder has a right of control in excess of the working of the
company through attending and voting in the common meeting. They
 are able to decisively power the composition of Board of Directors and
other senior management positions. The debenture holders do not have
any voting right, and so, they are unable to exercise any such power.
A shareholder is entitled to receive dividend when there are profits.
The rate of dividend varies from year to year depending upon the
amount of profit. On the other hand, the debenture holders are entitled
to interest at a fixed rate which the company necessity pay whether or
not there are profits.
A debenture holder gets a fixed rate of interest per annum payable on
'fixed dates' whereas a shareholder gets a dividend distant higher if the
company earns good profits.
In respect of shares, dividend is payable only when the proposal to pay
dividend is passed through the shareholders at the annual common
meeting of the company. There is no need of such approval in the case
of payment of interest on debentures.
Dividend on shares is not a charge against profit, Interest on
debentures, on the other hand, is a charge against profits and is
deducted from profits for the purpose of calculating tax liability.
A shareholder has a claim on the accumulated profits of the company
and is normally rewarded with bonus shares whereas a debenture
holder has no such- claims whatsoever after he has been paid the
interest amount.
Shareholders cannot be paid back (except in case of redeemable
preference shares) so extensive as the company is a going concern.
Debentures are normally issued for a specified era after which they are
repaid.
A company cannot purchase its own shares from the market whereas it
can purchase its own debentures and cancel them or re-issue them.
In the event of winding up, shareholders cannot claim payment unless
all outside creditors have been paid in full. Debenture holders being
secured creditors get priority in payment in excess of the shareholders.

PUBLIC DEPOSITS

i
 You have learnt in relation to the two main sources of raising funds through a company
i.e. shares and debentures. Public deposit is another significant source of meeting short-term
capital necessities. In order to draw deposits, companies often offered interest at a high rate
and accepted deposits distant beyond their capacities. As a result thereof, several companies
failed to repay the deposits on due dates and some of them even went into 'liquidation. In
order to protect the interest of depositors and to ensure that the companies do not indulge in
wreckless borrowings, two new Sections58A and 58B were introduced through the
Amendment Act of 1974. Government has now the powers to regulate the limits, manner, and
circumstances of acceptance of public deposits through companies. For this purpose
Companies (Acceptance of Deposits) Rules; 1975 have been framed.

Meaning of Deposit

According to Explanation to Section 58A of the Companies Act, the term 'deposit' means
any deposit of money with, and comprises any amount borrowed through a company. Deposit
comprises all kinds of deposits - public or private. It comprises inter-company deposits.

A number of amounts received through the company are not measured as deposits within
the meaning of this section. The following amounts are not treated as deposits:
Any amount received from the central or a state government or from a
local authority or a foreign government.
Any amount‟ received as a loan from any banking company or from
State Bank of India or its subsidiaries or from a co-operative bank.
Any amount received as a loan from financial organizations such as
Industrial Finance Corporation of India, 'State Finance Corporations,
and Unit Trust of India. Industrial Development Bank, Life Insurance
Corporation of India, etc.
Any amount received through a company from any other company
Amounts received through method of security deposits from
employees.
Amounts received as security or as an advance from any purchasing or
selling agent or other agents in course of or for the purpose of business
of the company or an amount of advance received from customers for
supply of goods or for rendering of any service.
Amounts received through method of subscriptions to any shares,
stock, or debentures pending then allotment.
 Amounts received in trust or any amount in transit.

Deposits and Loan

Sonic people say that deposits are nothing hut a type of loan, but this is not true. Whether
a scrupulous transaction is a deposit or loan, we should sec the intention of the parties and all
the circumstances of the case. Deposit and loan, both are repayable. The real point of
distinction is when the repayment is to be made. A loan is repayable the minute it is incurred.
But this is not so with a deposit. Deposits are repayable upon the maturity date fixed so or
according to the conditions of the agreement. In easy words, unlike a loan, there is no
immediate obligation to repay in the case of a deposit.

Deposits and Debentures

Some persons put deposits and debentures in the similar category because the element of
indebtedness is general. Rut it is not true, deposits are repayable after the expiry of six months
but not later than thirty six months from the date of acceptance or renewal of such deposits.
Therefore, the era of deposit is restricted while there is no such limit in case of debentures.
Then, unlike debentures, deposits are not transferable.

Roles Concerning Acceptance of Deposits

The acceptance of deposits through non-banking and non-financial companies are

controlled through the Reserve Bank of India. As per the new Section 58 A the control on
acceptance of deposits through non-banking and non-financial companies has been shifted to
the central government. The central government has delegated its powers and functions in this
regard to the Company Law Board (CLR). The rules concerning acceptance of deposits
through a company are as follows:
A company desirous of raising funds through public deposits has to
provide a public advertisement in the newspapers showing therein the
financial location, management structure and other specified
particulars of the company. The advertisement should also provide
brief particulars of the latest audited balance sheet of the company and
the proposed utilization of the money to be received as deposit. The
company is required to deliver a copy of this advertisement to the
Registrar of Companies. In case a company docs nut want to provide a
 public advertisement then a statement in lieu of such advertisement
should be filed with the Registrar.
The company should give to a prospective depositor a form for
creation an application for deposit. 1 his form should contain a
declaration, to be signed through the depositor, to the effect that this
deposit is not being made out of funds acquired through him through
borrowing or through accepting deposits.
The company is required to furnish to cacti of the depositors a
receipt in respect of each deposit containing the information such as
date of deposit, name, and address of depositor, amount of deposit,
rate of interest and the date of repayment.
A company can accept deposits for a era which will not be less than
six months and more than thirty six months. A finance company can
accept deposits for a era of sixty months,
A company may accept short-term deposits repayable not earlier
than three months hut not later than six months subject to the
following two circumstances:
The funds are needed to meet short- term requirement, and
The amount of such short-term deposits does nut exceed ten per cent
of the paid- up capital and free reserves.

Though, in no case, a company shall accept deposits repayable before three months.
A company cannot accept or renew deposits payable on demand.
A company can accept deposits upto 25% of the aggregate of its paid-
up capital and free reserves. In addition, it can also raise upto 10% of
the paid-up capital and free reserves in the form of any deposit against
an unsecured debenture or from its shareholders or any deposit
guaranteed through the Directors of the company. A finance company
is allowed to raise deposits upto ten times the amount of its capital and
free reserves. Paid-up Capital for this purpose will contain both
preference and equity capital.
No government company shall accept any deposits in excess of thirty-
five per cent of its paid-up capital and free reserves.
No company shall invite or accept or renew any deposits in any form,
on a rate of interest exceeding fourteen per cent per annum (w.e.f.
1.4.87).
Every deposit accepted through a company, shall unless renewed, be
repaid in accordance with the conditions and circumstances of such
deposit. Where any deposit is accepted through a company in
contravention of the provisions of the Act or Rules made through the
Central Government, the deposit necessity be refunded within thirty
days from the date of acceptance of such deposit. This era of 30 days
may be extended through the Central Government through another era
but not exceeding 30 days.
If a company fails to create repayment of a deposit in accordance with
the provisions, the company shall be punishable with a fine which shall
not be less than twice the amount not repaid and the court shall pay the
amount of deposit remaining unpaid to the depositor out of the amount
of fine realized. In addition, every officer of the company who is in
default shall be punishable with imprisonment for a term which may
extend to five years and shall also be liable to fine.
Where a company accepts or invites any deposit in excess of the limits
prescribed or in contravention of the provisions of Section 58A(2) the
punishment shall be:
Where the contravention relates to the acceptance of deposit, the
amount of fine shall not be less than the amount of the deposit so
accepted.
Where the contravention relates to the invitation of any deposit, the
company shall be punishable with fine which may extend to Rs. 1 lakh,
but which shall not be less than Rs. 5,000.
In both these cases of acceptance or invitation of deposit in
contravention, every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to five
years and shall also be liable to fine.
Every company accepting deposits is required to uphold one or more
registers of deposits containing all the required information and should
 be preserved in good order for a era of not less than eight calendar
years from the financial year m which the last entry is made in the
register.
Every company accepting deposits shall also file Returns of Deposits
as on 31st March every year before 30th June every year with the
Registrar of companies and the Reserve Bank of India.

Section 58A has been amended through the Companies (Amendment) Act, 1988 to give
that in the event of the failure of a company to repay any deposit or part thereof in accordance
with the conditions and circumstances of such deposit, the Company Law Board may either on
its own motion or on the application of the depositor, direct the company to create repayment
of such deposit forthwith or within such time and subject to such circumstances as may be
specified in the order. Though, before creation any order the CLB shall provide a reasonable
opportunity of being heard to the company and to other persons interested in the matter.

Whoever fails to comply with any order made through CLB shall be punishable with
imprisonment which may extend to three years and shall also be liable to a fine of not less
than Rs. 50 for every day throughout which such non-compliance continues.

REVIEW QUESTIONS
What is meant through 'Registered Capital‟? What are the two types of
share capital?
What is a reserved capital? Can a charge through created on reserve
capital?
What do you mean through the term 'Share'? Distinguish flanked by
„Share‟ and 'Stock'.
Enumerate the provisions for redemption of preference shares.
Distinguish flanked by shares and debentures.
 CHAPTER 9

Allotment of Shares

STRUCTURE
Learning objectives
Allotment of shares
Irregular allotment and its consequences
Issue of shares at a discount
Issue of shares at a premium
Share certificate
Share warrant
Calls on shares
Forfeiture of shares
Re-issue of forfeited shares
Surrender of shares
Review questions

LEARNING OBJECTIVES
After learning this chapter, you should be able to:
Explain the meaning of allotment of shares
Describe the rules relating to allotment of shares
Explain the con-sequencer, of irregular allotment
List the circumstances under which the shares can be issued at a
discount and at a premium
Explain the meaning of a share certificate and a share warrant, and
distinguish flanked by the two
Explain the essentials of a valid call
Describe the circumstances under which the shares can be forfeited and
reissued
Explain the rules for the surrender of shares.

ALLOTMENT OF SHARES
 You know that a, public limited company invites subscriptions from the public and for
this purpose a prospectus is issued. In response to this invitation, the prospective investors
offer to buy shares through submitting the prescribed application form. If the application is
accepted through the company, it proceeds to allot him the shares. With the issue of the latter
of allotment, the offer stands accepted thereby giving rise to a legally binding contract flanked
by the company and the shareholder. Therefore, an allotment is the acceptance through the
company of the offer to purchase shares.

The term 'Allotment' has nowhere been defined in the Companies Act. It may be said that
allotment is an appropriation through the Board of directors of a sure number of shares to a
specified person in response to his application. In other words, allotment means the
appropriation out of the previously unappropriated capital of a company, of a sure number of
shares to a person.

Notice of Allotment

An allotment is the acceptance of an offer to take shares through an applicant, and like
any other acceptance, it necessity be communicated. There can be no binding contract unless
the acceptance of the offer is properly communicated. Therefore, notice of allotment necessity
be given to the allottee. If the letter of allotment is properly posted i.e., it is correctly
addressed and stamped, a contract will arise even if the letter of allotment is delayed or lost in
the course of transit. In this letter of allotment, besides other details of the number of shares
applied for, the number of shares allotted etc., the allottee is asked to pay the money due on
allotment to the company's bankers within a specified time unless there is partial allotment
and the allotment money is appropriated out of the excess application money.

Rules Concerning Allotment of Shares

The rules concerning allotment of shares can be discussed under the two broad headings
(a)'common rules and (b) the legal rules.

Common Rules
You know that the allotment is the acceptance of an offer to purchase sure number of
shares. So, the common rules relating to valid acceptance of an offer necessity be followed.
The common rules concerning allotment of shares are as follows:
The allotment necessity be made through proper authority: It is the
duty of the Board of directors to allot the shares. Though, the Board
 may delegate this authority to some other person or persons as per the
provisions of the articles of association. Allotment of Shares made
through an improper authority will create it void.
The allotment should be made within a reasonable time: The offer to
purchase shares of the company necessity be accepted within a
reasonable time otherwise the applicants may refuse to take shares
because after a reasonable time the offer lapses. What is the 'reasonable
time' is a question of information in each case.
It necessity be communicated: The allotment of shares should be
communicated to the applicants. Posting of a properly addressed and
stamped letter of allotment will be taken as a valid communication.
Even if this letter of allotment is delayed or lost in transit, the allottee
will be liable. „G‟ applied for sure shares in a company. The letter of
allotment was dispatched to him but it never reached. It was held that
'G' was liable as a shareholder (Household Fire Insurance Co. Ltd. v.
Grant).
It necessity be absolute and unconditional: The allotment of shares
necessity conform to the conditions and circumstances of the
application. If the allotment is not according to the conditions and
circumstances, the applicant may refuse to accept the shares even
though allotment has been made to him. If the circumstances are not
fulfilled, the applicant necessity reject the shares promptly. His silence
or acceptance will debar him from this right.

Legal Rules
You should note that so distant as the private companies are concerned, the Act does not
lay down any restrictions as to the allotment of shares. But the Act has laid down sure
restrictions concerning the allotment of shares through public companies.

When no public offer is made: Where a public company does not offer its shares to the
public but arranges the capital privately, the company cannot proceed with the allotment
unless it files with the Registrar of Companies at least three days before the first allotment, a
statement in lieu of prospectus. If the allotment is made in contravention to this provision, it
will be termed as 'irregular allotment' and it shall be voidable at the option of the allottee. In
addition to this, every officer of the company, who is a party to such allotment, shall be
punishable with fine which may extent to Rs. 1,000.

When an Offer is made to the Public: Where a company offers to shares to the public:

A prospectus necessity be issued and a copy of the similar should be

filed with the Registrar: You should note that the company cannot
allot the shares immediately after issuing the prospectus. No allotment
can be made until the beginning of the fifth day from the date of issue
of prospectus. The fifth day is to be counted from the date of issue of
prospectus was published or was otherwise notified to the public. The
beginning of the fifth day is recognized as 'the time of the opening of
the subscription lists'. The substance of this provision is to enable the
public to go through the prospectus and to decide whether to apply for
the shares. The Companies Act, though, does not specifically give for
the time of closing the subscription list. It means that the company may
stay the subscription list open for any length of time it wants.
According to stock swap regulations where the shares are listed on any
stock swap, the subscription list necessity be kept open for at least
three days, In such cases, the prospectus usually mentions the time of
closing of the subscription lists.
Minimum subscription: No company can proceed to allot shares to the
public until the minimum subscription (which is 90%'the issue amount)
has been subscribed, and the sum payable on applications for it has
been received through the company in cash. If the company does not
receive the minimum subscription of 90% of the issue amount, the
whole subscription will be refunded to the applicants within 90 days
from the date of closure of the issue. If there is a delay in refund of
such amount through more than ten days, the company is liable to pay
interest at the rate of 15% per annum for the delayed era.
Application money: It is the amount which is payable on each share
along with the application for purchase of shares. The amount payable
on application on each share shall not be less than 5 per cent of the
nominal amount of the share.
 Application money to be deposited in a scheduled bank: All the
money received from applicants necessity be deposited in a scheduled
bank and it shall remain there until the certificate to commence
business is received.
Allotment of shares to dealt in on stock swap: According to Section
73(1) of the Companies Act, every company intending to offer shares
to the public for subscription through the issue of a prospectus shall,
before such issue, create an. application to one or more recognized
stock exchanges for permission for the shares to be dealt with in the
stock swap. Therefore, now it is made compulsory that the shares
necessity be listed on a recognized swap. The prospectus necessity
state the name of the stock swap or each of such exchanges where the
application has been 'made, the permission has not been granted before
the expiry of ten weeks from the date of closing of the subscription
lists, the company necessity immediately repay the money received
from the applicants. If it is not repaid with in has the directors shall be
liable to repay it with interest at such rate, which should be less than
four per cent and more than fifteen per cent per annum. Though a
director may escape liability if he can prove that there was no
negligence or misconduct on his part.
Subsequent allotment of shares: The rules concerning the subsequent
allotment of shares are the similar except the rule concerning minimum
subscription.

Procedure of Allotment

When the company receives from bankers all the share applications, a share application
list is prepared. You should keep in mind that only the names of such applicants should be
recorded who have paid the application money because an application without application
money is void. The directors will see that all the legal rules concerning allotment have been
complied with, and then they will proceed with the allotment of shares. If the issue has been
presently fully subscribed, then there is no trouble in allotment, the directors can allot to each
applicant the number of shares asked for.
 But the real difficulty arises in case of in excess of-subscription. An issue is said to be in
excess of subscribed if the number of shares applied for is greater than the number of shares
accessible for allotment. In case of in excess of-subscription, the applicants will have to be
allotted less number of shares than applied for, it is recognized as partial allotment. A scheme
of foundation of allotment is framed in consultation with the stock swap where the shares are
to be listed. This guidelines the Government has emphasized that the scheme of allotment
should be framed in such a manner that the interests of genuine small investor are promoted
and the widest dispersal of the shareholding takes lay. In order to ensure that no one corners a
major portion of the shares accessible, the multiple application from the similar person have
been prohibited.

In case of in excess of-subscription, the shares are allotted either through draw of lots
(lottery): or- on pro-rata foundation i.e. through allotting shares to each applicant in the
proportion to the number of shares applied for. In order to ensure that an applicant may not
refuse to accept a smaller number than applied for, the application form usually contain a
clause saying “I/We agree to accept such shares or any smaller number that may be allotted to
me/us.”

According to the latest guidelines issued through the Controller of Capital Issues, the case
of equity shares, the companies are allowed, at their option, to retain in excess of-subscribed
equity to the extent of 15 per cent of the amount for which consent of the CCI has been
sought.

You should keep in mind that when lesser number of shares are allotted to an applicant,
the excess application on money is not refunded to him but it is transferred to his allotment
amount and adjusted against the allotment money due from him,

In case of under-subscription, the Board of directors has only to ensure that the minimum
subscription has been received, and then they can proceed with the allotment work. When the
Board of directors pass a resolution confirming the allotment and, if for some cause, no shares
are allotted to an applicant, then a letter of regret is sent to him along with a crossed cheque
for the refund of the share application money,

Return as to Allotment

You learnt the rules and the procedure of allotment of shares. Section 75 of the
Companies Act gives that when a company having a share capital creates any 'allotment of its
shares, the company necessity within 30 days of the allotment, file with the Registrar a
statement recognized as "return as to allotment". The return necessity contain particulars
relating to the number and nominal amount of shares allotted, the names, addresses and job of
the allottees and the amount due or paid on allotment.

Where shares are allotted for consideration other than cash, the company will produce for
the inspection of the Registrar, a contract in writing constituting contract of sale or for services
for which the shares are being allotted.

Where shares are issued at a discount, a copy of the resolution passed through the
company authorizing such issue jointly with the order of the Company Law Board sanctioning
the issue shall also be filed with the Registrar Allotment of shares.

In the case of bonus shares, the return necessity state the number and nominal amount of
such shares and names, addresses and occupations of the allottees and a copy of the resolution
authorizing the issue of such shares.

A company is not required to file a return of allotment when forfeited share are reissued,
because it does not amount to allotment, it is basically a resale of shares.

IRREGULAR ALLOTMENT AND ITS CONSEQUENCES

An allotment of shares shall be termed irregular if it is made without fulfilling the
circumstances precedent to a regular allotment. The allotment of shares is irregular in the
following cases:
Where an allotment is made without getting the minimum subscription.
Where an allotment is made without getting at least five per cent of the
nominal value of shares as application money.
Where an allotment is made without depositing the application money
in a scheduled bank...
In the case of a company which does not invite public to subscribe its
shares, if the allotment is made without filing with the Registrar the
'Statement in lieu of prospectus' at least three days before the first
allotment of shares.
Where the company fails to apply for listing of its shares in one or
more recognized stock exchanges before the tenth day after the first
issue of prospectus or where such permission has been applied for
before that day but the permission has not been granted through the
stock swap before the expiry of ten weeks from the date of the closing
of the subscription list.
 Where the allotment is made before the expiry of the fifth day after the
date of issue of the prospectus.

Consequences

The consequences of an irregular allotment are as follows:

Voidable at the option of the allottee: In the first four cases the
allotment is voidable at the option of the allottee. But this right should
be exercised through the allottee within two months after the holding
of the statutory meeting through the company or where the company is
not required to hold a statutory meeting or where the allotment is made
after the holding of the statutory meeting, within two months after the
date of allotment. It is not necessary that the allottee necessity
commence legal proceedings within the said era, what is required is
that he necessity provide a notice to the company of his intention to
avoid the allotment. The option to avoid the allotment can be exercised
even after the company has gone into liquidation and is in the course of
liquidation.
Fine: Where time limit concerning the opening of the subscription list
is not observed, the allotment remnants valid but the company and
every officer who is in default are liable to a fine upto Rs. 5.000 each.
Allotment is void: If the application for listing of shares has not been
made or such a request for permission of shares to be dealt in the stock
swap has not been granted within the prescribed time, the allotment
shall be void. In this case the money necessity be returned within eight
days, failing which the directors are liable to pay it with interest at such
rate which shall not be less than 4 per cent and not more than 15 per
cent as may be prescribed, having regard to the length of the era of
delay in creation repayment.
Director's liability: The directors of the company who are responsible
for irregular allotment, are liable to compensate the company and the.
allottee for any loss, damages, or cost suffered or incurred through
 them. Though, the action to recover such loss or damage or cost
necessity be started within two years of allotment.

ISSUE OF SHARES AT A DISCOUNT

You have learnt that the share capital of a company is divided into shares of fixed face
value. A company may issue shares at a price less than the face value of the share. In that case,
it is termed as 'issue of shares at a discount'. For instance. if a share of Rs. 10 is issued at Rs. 9
per share, it means that the share is issued at a discount of Re. 1. Usually, the issue of shares at
a discount is discouraged and that is why the Companies Act has imposed strict restrictions on
the issue of shares at a discount.

Section 79 of the Companies Act gives that a company may issue shares at a discount, if
the following circumstances are satisfied:
The shares offered at a discount necessity be of a class already issued
i.e., the first issue cannot be at a discount.
At least one year necessity have elapsed since the company became
entitled to commence issue. It means that in the first year of its
working, shares cannot be issued at a discount.
The issue necessity be authorized through an ordinary resolution
passed in the common meeting of the company and this necessity be
confirmed through the Company Law Board.
The resolution necessity specify the maximum rate of discount which
in no case shall exceed 10%. Though, a higher rate of discount may be
allowed if the Company Law Board agrees to a higher rate.
The shares necessity be issued within two months after getting the
sanction of the Company Law Board or within such extended time as
the Company Law Board may allow.
Every prospectus shall contain particulars of the discount allowed on
the issue of shares or so much of that discount as has not been written
off on the date of issue of the prospectus.

Where the shares are issued at a discount in contravention of the above provisions, the
company and every officer of the company responsible for the contravention are liable to a
fine up to Rs. 50. Further, the allottees of such shares who allow themselves to be registered as
members shall be required to pay the full value of their shares.
ISSUE OF SHARES AT A PREMIUM
There can be cases when the company may issue shares at a price higher than the face
value of the shares. This is termed as issuing the shares at a premium. For instance, when a
share of Rs. 10 each is issued at Rs. 12 per share, it is an issue at a premium, the amount of
premium being Rs. 2 per share. There is no restriction on the issue of shares at a premium; if
the company's reputation is good then it can sell shares at a premium.

Though the Companies Act does not give for any circumstances for the issue of shares at
a premium, it regulates the disbursement of the amount composed as premium.

The premium amount cannot be treated as profits and as such it cannot be used for paying
dividends. The premium amount necessity be transferred to a separate amount recognized as
'Share Premium Account'. Where the shares are issued at a premium for consideration other
than cash, an amount equal to the amount of premium necessity be transferred to 'Share
Premium Account'.

The amount of 'Share Premium Account' can be used only for the purposes specified
under Section 78 of the Act. These purposes are:
Issue of fully paid bonus shares to the members of the Company.
Writing off the preliminary expenses of the company.
Writing off the expenses, commission paid or discount allowed on the
issue of the shares of the company.
To give for the premium payable on the redemption of preference
shares or debentures of the company.

The balance sheet of the company necessity disclose the amount of share premium, and if
it has been disposed of, partly or wholly, it necessity also disclose the manner in which it has
been disposed of. The share premium amount should not be treated as free reserves as it is in
the nature of the capital reserve.

SHARE CERTIFICATE
A share certificate is a certificate issued through the company under its general seal
specifying the shares held through any member and the amount paid on each 'Share. A share
certificate is an proof of title of the allottee or transferee to the shares. It is a declaration that
the person in whose name the certificate is made out and to whom it is, given is a shareholder
in the company. Though, it should be remembered that it is not' a negotiable instrument,
 The share certificate may be in any form, but a valid share certificate necessity have the
following contents:
Name of the company;
Name and address of the shareholder;
Number of shares held through him;
Distinctive number of shares;
Amount paid on each share;
Date of issue;
Share certificate number;
Stamp;
Signatures of two directors and the Secretary.

Every person whose name is entered as a member in the Register of members is entitled
to receive one share certificate for all his share without payment. A share certificate is
measured to the prima facie proof of the title of the member to the shares mentioned in the
certificate.

Issue of Share Certificates

The Companies Act has laid down time limits within which the share certificate necessity
be delivered. According to Section 113 of the Act, every company necessity deliver within
three months of the date of allotment and within two months after the. date of registration of
transfer, a share certificate to the allottee or transferee of shares. Though, in appropriate cases
the Company Law Board may extend this era upto a further era of nine months.

If default is made in complying with these provisions, the company and every officer of
the company who is in default shall be liable to fine upto Rs. 500 for every day throughout,
which the default continues.

If a company creates default in issuing the share certificate, the member can file a
complaint with the Company Law Board. The CLB will then issue a notice to the company to
create good the default. If the default is not made good within ten days of the service of the
notice, the CLB may create an order directing the company and any officer of the company to
create good the default within such time as may be specified in the order.
Effects of a Share Certificate

You have learnt that share certificate is prima facie proof of the title of the member to the
shares specified therein. Following are the effects of a share certificate:
Proof of title: When the share certificate is issued, the company is
estopped from denying the title of the person to the shares whose name
is mentioned in the certificate, provided that person has acquired the
shares in good faith and under a genuine transfer for value. Though, it
is not a conclusive proof of the title of the holder. If a person has
obtained some shares on the foundation of a forged transfer, the
company can refuse to register the transfer of shares. You should keep
in mind that share certificate is only an proof of title and is not a
document of title. It is not a negotiable instrument which can be
transferred through mere delivery of the certificate.
Estoppel as to payment: You know that the share certificate states the
amount paid on them. A company is estopped from stating that the
amount stated as having been paid on the shares has not been paid. For
instance, if the share certificate states that the full amount on the shares
has been paid, then the company is prevented from saying that the
shares are not fully paid.

Duplicate Share Certificate

A certificate may be renewed or a duplicate of a certificate may be issued if such a

certificate
Is proved to have been destroyed or lost; or
Having been defaced, mutilated or torn, is surrendered to the
Company.

The information of being a duplicate share certificate necessity be mentioned on the

certificate. The company may charge a fee not exceeding Rs. 2 per certificate while issuing a
duplicate one.

If a company renews a share certificate or issues a duplicate one with intent to defraud,
then company shall be punishable with fine which may extend to Rs. 10,000 and very officer
of the company who is in default shall be punishable with imprisonment for a term upto six
months or with fine upto Rs. 10,000 or with both,

SHARE WARRANT
A share warrant is a bearer document of title to the specified shares. A share warrant is a
document issued under the general seal of the company stating that the bearer is entitled to the
specified number of shares. Since it is a bearer document, it can be transferred through mere
delivery. Therefore, the holder of a share warrant is entitled to the shares specified therein.

Rules Concerning Share Warrants

A public company limited through shares may issue share warrants under its general seal
in the following circumstances:
If it is authorized through its articles;
Shares are fully paid-up; and
Previous approval of the Central Government is obtained.

It should be clear to you that share warrants can be issued only through public companies
in respect of fully paid shares. It is a substitute for the share certificate.

When a share warrant is issued, the company strikes out the name of the member from the
register of members of the company and creates a note in relation to the issue of a share
warrant. The date of issue of share warrant is also recorded.

The holder of the share warrant, whenever he desires, can surrender it to the company for
cancellation. Subject to the articles of the company, the holder is 'entitled to have his name
recorded as a member in the register of members through paying such fee to the company as
the Board of directors of the company may from time to time determine.

Since the name of the shareholder is struck off from the register of members, it shall not
be possible for the company to know as to whom the dividends are to be paid. So, coupons are
attached to a share warrant to give for the payment of dividends.

Ordinarily, the holder of a share warrant is not measured as a member of the company.
But, if the articles so give, the bearer of the share warrant could be treated as a member of the
company and he can attend the meetings of the company and cast his vote therein.
Distinction flanked by a Share Certificate and a Share Warrant

You have learnt in relation to the nature of a share certificate and share warrant. Now you
should be able to distinguish flanked by the two. The distinction flanked by the two may be
noted as follows:
A share certificate can be issued through private as well as public
companies, whereas share warrants can be issued only through public
companies.
A share certificate is issued in respect of partly or fully paid shares,
whereas a share warrant can be issued only in respect of fully paid
shares.
The issuing of a share certificate is a statutory obligation and it
requires no approval of the Central Government, but for the issue of
share warrants the sanction of the Central Government necessity be
obtained.
The holder of a share certificate is a member of the company. But the
bearer of the share warrant is ordinarily not measured as a member of
the company because on the issue of share warrant, the name of the
shareholder is struck off from the register of members. Though, if the
articles so give, the bearer of the warrant may be treated as member for
the purposes defined in the articles.
The share certificate can be transferred through executing a transfer
deed and delivering the share certificate along with it, while share
warrants can be transferred through more delivery.
Stamp duty is payable on transfer of shares, while no stamp duty is
payable on transfer of share warrants.
A share certificate is not a negotiable instrument, while a share warrant
is measured to be a negotiable instrument.

CALLS ON SHARES
When a company issues shares, the applicants are usually not required to pay the full
value of the shares in one installment. To start with they are required to pay the application
money only.

The balance amount is to be paid later on. Some amount is payable at the time of
allotment. It is termed as 'allotment money'. The balance amount is described through the
company in installments. Each installment is termed as a 'call'. You necessity keep in mind
that the amount paid on application and allotment are not termed as calls.

A call may be defined as a demand through the company on the shareholders to pay
whole or part of the balance remaining unpaid on each share, made at any time throughout the
' life-time of the company,

Essentials of a Valid Call

According to Section 36(2) of the Act, the unpaid money on a share is a debt due from
member. So, once a call has been made, the shareholder is under an obligation to pay the
amount described. But the liability to pay this debt or call will not arise until a valid call has
been made. The essentials of a valid call are as follows:
The call necessity be made under a resolution of the Board of directors,
The resolution necessity be passed in a properly convened meeting of
the directors,
The resolution necessity specify the amount of call, and the time and
lay of payment of calls.
Call should be made on a uniform foundation, on all shares, falling
under the similar class i.e., no differentiation should be made flanked
by shareholders of the similar class.
The power to create call is in the nature of trust and so, the directors
necessity exercise this power in good faith and for the benefit of the
company. The directors should not create calls for their own benefit, if
it is for their own benefit, it shall be an invalid call.
The call necessity be made according to the provisions of the articles
of association, some of the rules are:
The maximum amount per call shall not be more than 25 per cent of
the nominal value of shares.
There necessity be at least one month's interval flanked by two calls.
At least fourteen days' notice necessity be given to each member.
The directors have the discretion to revoke or postpone a call.
Payment of Calls in Advance

Section 92(1) of the Companies Act empowers the company to receive from shareholders
the money not yet described up. It gives that a company may, if so authorized through its
articles, accept from any member the whole or a part of the amount remaining unpaid on any
shares held through him, although no part of that amount has been described up.

Though, the shareholder shall not be entitled to any extra voting rights in respect of the
money paid in advance,' until the similar become payable through a valid call. You necessity
note that advance calls should be received only for the benefit of the company.

According to Section 93 a company may, if so authorized through its articles, pay

dividends in proportion to such amount. Articles may give for the payment of interest on calls
in advance, but it shall not be mare than 6 p.c, per annum unless the company in general
meeting otherwise decides. Shareholders who have paid calls in advance are treated as the
creditors of the company for the amount of interest due to them. Where it is decided to pay
interest on calls in advance, it may be paid out of capital, if profits are got accessible. Later on,
when the company creates the calls, the money received in advance ' is accordingly
adjusted and then the shareholders get the necessary voting right in respect of them.

FORFEITURE OF SHARES
You have learnt that the company does not require the shareholders to pay the full amount
of shares in one installment. It creates calls on them as and when the money is needed. If a
shareholder fails to pay a valid call within the stipulated time, the company has two options:
(1) the company may file a suit for the recovery of the amount, or (2) the company may forfeit
the shares. The first option is a lengthy procedure. So, the company usually decides to forfeit
such shares.

The term 'forfeiture' means taking them absent from the member. It deprives the
shareholder of his property. The shares can be forfeited only if there is a provision to this
effect in the articles of the company. You necessity note that shares can be forfeited only for
non-payment of any call or installment of a call and not for any other debt due from a
member.

The following rules are applicable relating to the forfeiture of shares:

The power to forfeit shares necessity be given in the articles of the
company. '
Shares can be forfeited only for non-payment of calls. A forfeiture on
any other ground is invalid.
 The company necessity serve a proper notice on the defaulting member
asking him to pay the amount within a fixed era, failing which the
shares shall be forfeited. The shareholder necessity be given at least
fourteen days notice to pay the amount. The notice necessity indicate
the exact amount to be paid. If there is a slight defect in the notice, the
forfeiture will become invalid.
The Board of directors necessity pass a resolution for the forfeiture of
shares.
The power for forfeiture necessity be exercised in good faith and for
the benefit of the company. A forfeiture for the purpose of relieving a
friend from liability shall be invalid.

Effects of Forfeiture

The shareholder ceases to be a member of the company in respect of

such shares. He loses all his rights. The money paid on such shares is
forfeited. On forfeiture, his name is removed from the register of
members.
The shareholder cannot be sued through the company for unpaid calls.
The articles of the company may, though, create him liable for the
unpaid calls. Any action necessity be taken within three years from the
date of forfeiture.
The former share holder' can be placed on the "B‟ list of contributories,
if the company is wound up within twelve months of the date of
forfeiture.
After forfeiture, the shares become the property of the company and
the company can dispose them of in any manner it likes. Usually, the
forfeited shares are reissued.
If the shares have been forfeited wrongfully, the concerned shareholder
can sue the company for cancelling the forfeiture. But if it is not
possible on account of there issue of forfeited shares, he can sue the
company for damages.
RE-ISSUE OF FORFEITED SHARES
When the shares are forfeited, they become the property of the company and, to that
extent, the paid-up capital of the company stands reduced. So, the forfeited shares are usually
reissued through the company. The forfeited shares can be reissued at any price i.e., even at
discount. But the amount of discount necessity not exceed the amount forfeited on such
shares. The reissue is done through a resolution of the Board of directors. After the reissue, the
buyer of such shares shall become liable to pay all the future calls due on shares, including the
calls for which the shares were forfeited. The name of the buyer shall be recorded in the
register of members and if the original shareholder has surrendered the share certificate, the
similar shall be transferred in the name of the buyer; otherwise a new share certificate shall be
issued.

The title of the buyer shall not be affected through any irregularity or invalidity in
proceedings with reference to forfeiture. It should though, be noted that reissue of forfeited
shares is a sale of shares and it does not amount to an allotment. So, return of allotment need
not be filed with the Registrar.

SURRENDER OF SHARES
Surrender is a voluntary act of the shareholder under which the shares are returned to the
company for purposes of cancellation. Neither the Companies Act nor Table 'A' gives for the
surrender of shares. But, the articles may give for the surrender of the partly paid-up shares
under circumstances where forfeiture appears to be justified.

You necessity note that when shares are surrendered to the company, no amount is
refunded to the shareholder. It is so, because if some money is refunded it will amount to a
purchase through the company of its own shares which is prohibited through Section 77 of the
Companies Act.

Surrender of shares may be allowed in the following cases if its acceptance is authorized
through the articles of the company:
When shares are surrendered in swap for new shares of the came
nominal value, as it does not amount to any reduction of capital.
When the circumstances are such where forfeiture is justified, because
surrender is a short-cut to forfeiture.

If the surrender of shares is accepted through the company for any other
cause, it will be invalid.
 On a valid surrender of shares, the member ceases to be a member of the
company, but his name can be placed on list 'B' contributories. Because if the
company is wound up within twelve months of the surrender of shares, he
shall be liable as a past member. If the surrender of shares is proved to be
illegal, the shareholder may apply for the rectification of register of members
after lapse of any number of years, provided the shares have not been reissued
in the meantime.

Forfeiture and surrender of shares, both lead to the termination of

membership. But in ]case of forfeiture it is compulsory or a forced action,
while in case of surrender it is a voluntary act on the part of the member to
avoid the disgrace of forfeiture.

REVIEW QUESTIONS

Explain the procedure of allotment of shares.

What is an irregular allotment? What are its consequences?
What is meant through return of allotment?
Under what circumstances can a company issue shares at a discount?
When shares can be issued at a premium? For what purposes the
premium amount can be utilized?
 CHAPTER 10

Directors

STRUCTURE
Learning objectives
Definition of a director
Location of directors
Number of directors and directorships
Qualifications of a director
Disqualifications of directors
Appointment of directors
Vacation of office through directors
Removal of directors
Powers of directors
Duties of directors
Liabilities of factors
Meetings of directors
Review questions

LEARNING OBJECTIVES
After reading this chapter, you should be able to:
Describe a director
Explain the legal location of directors '
Describe the qualifications and disqualifications of a director the
procedure of appointment of directors
List the circumstances when the director's office falls vacant
Explain the mode of removing a director
Describe the powers, duties and liabilities of directors
Explain the rules relating to the meetings of director'

DEFINITION OF A DIRECTOR
 The directors are the person selected through the Shareholders to direct, conduct, manage,
or supervise the affairs of the company. They manage and control the overall affairs of the
„company. The day to day working of the company is left to other managerial person
appointed for the purpose.

Section 2(13) of the Companies Act defines a director as "any person occupying the
location of director through whatever name described." This is an inclusive and not an
exhaustive definition. To explain the meaning of the term 'director' we can say that directors
are the individuals who direct, control, manage, or superintend the affairs of a company.

According to explanation 1 to Section 303 of the Act, any person, in accordance with
whose directions or instructions, the Board of Directors of a Company is accustomed to act,
shall be deemed to be director of the company. If a person performs the functions of a
director, he will be deemed to be a director, even if he is not so designated. Therefore , it is
immaterial through what name be is described. Though, the experts who provide professional
advice, shall not be deemed to be directors.

You should note that only an individual can be appointed as a director. According to
Section 253 of the Act no body corporate, association, or firm shall be appointed as a director
of a company.

LOCATION OF DIRECTORS
It is not easy to explain the legal location of the directors because the similar have not
been defined through the companies Act clearly. Bowen L J. observed "directors are described
sometimes as agents, sometimes as trustees and sometimes as managing partners. But each of
these expressions is used not as exhaustive of their powers and responsibilities; but as
indicating useful points of view from which they may, for the moment and the scrupulous
purpose, be measured." Therefore , the real location of a director is not merely that of an
agent, or trustee of managing partner, but a combination of all these positions. Let us now talk
about their location under several headings as follows:

As Agents? The company being an artificial person cannot manage its affairs on its own.
It has to be entrusted to some human agency recognized as directors. They are elected
representatives of the shareholders and may be termed as agents of the company. The
connection flanked by the company and its directors is that of principal and agent. So, the
common principles of the law of agency govern the dealings of the company and its directors.
As agents, it is their duty to carry on the business with reasonable care and diligence. They
necessity act within the authority conferred upon them through the Act, memorandum and
articles and while entering into contracts on behalf of the company within the scope of this
authority, they will bind the company. In other words, if they act beyond the scope of their
authority, they will be held personally liable. Though, you should note that the acts done
beyond the powers of the directors may be ratified through the shareholders in common
meeting of the company provided such acts are not, beyond the powers of the company.

To bind the company, the directors necessity act in the name of the company. Directors
are the agents of the company and not of the individual shareholders.

It is, though, not correct to say that directors are the agents of the company because
agents are not elected but appointed and secondly, the agents have no self-governing powers
while the directors have self-governing powers on sure matters.

As Trustees

The 'trustee' means a person who holds and manages the property for the benefit of other
persons. Though in the strict legal sense, directors are not the trustees of the company, but, to
some extent, they have been treated as trustees of the company. They are the custodians of the
money and properties of the company and as such are responsible for the proper use of such
money and property. If they misuse the money or property, they have to refund or re-imburse
the similar.

The directors necessity exercise their powers in good faith and for the benefit of the
company, and not for their own benefit. The directors stand in a fiduciary capability in relation
to the company. The similar degree of integrity arid average of conduct is . expected from the
directors as it is expected from a trustee. You should note that directors are trustees for the
company and not of individual shareholders.

Though, you should keep in mind that directors are not the trustees in the strict sense,
because unlike a trustee a director does not enter into contracts in his own name. He enters
into contracts for the company of which he is a director and he does not hold any property in
trust, because the property is held through the company in its own name.

As Managing Partner

Directors have been described as the managing partners because on the one hand, they are
entrusted with the management and control of the affairs of the companies and on the other
hand, they are the shareholders of the company. They manage the affairs of the company for
their own benefit as a shareholder and for the common benefit of the company.
 But they are not managing partners in the strict sense. because the liability of the director
is limited to the value of shares held through him whereas the liability of a partner is
unlimited. Further, unlike a partner, a director has no authority to bind the other directors and
shareholders.

As Employees

Directors are the elected representatives of the shareholders. As such, they are not
employees or servants of the company; But under a special contract with the company
director may hold a salaried employment in the company and in that cast he will be treated as
an employee or servant of the company and he will enjoy all the rights accessible to an
employee.

Therefore , it is clear from the directors are neither the agents, nor the trustees, nor
managing partners, nor employees of the company. In information, they combine in
themselves all these positions. They stand in a fiduciary location towards the company in
respect of their powers and capital under their control.

NUMBER OF DIRECTORS AND DIRECTORSHIPS

The Companies Act has fixed the minimum number of directors which a company
necessity have. According to Section 252 of the Act:
Every public company shall have at least three directors, and
Every other company shall have at least two directors.

The Companies Act has prescribed only the minimum number of directors but is silent on
the maximum number of directors. Subject to this statutory minimum, the articles of
association of a company may prescribe the minimum and maximum number of directors for
its Board of directors. Within the limits laid down in its articles, the company can augment or
decrease the number of its directors, through passing an ordinary resolution in the common
meeting [Section 258]. ' '

If a public company or a private company which is a subsidiary of a public company

wishes to Augment the number of directors beyond the limit laid down in the articles, it can do
so only with the approval of the Central Government. Though, if the augment in the number of
directors does not create the total number of directors more than twelve, the approval of the
Central Government will not be necessary [Section 259],

Number of Directorships: A person cannot be a director in more than twenty companies at

the similar time. If a person is already holding the office of director in twenty companies and
is appointed as a director in some other company, then in such a case the new appointment
shall not be effective unless within fifteen days of such appointment he has vacated his office
in any one of the companies in which he was already a director. His new appointment shall
become void if he fails to create a choice within the said fifteen days.

While calculating the number of twenty companies, the following shall he excluded:
An unlimited company;
A private company which is neither a subsidiary nor a holding
company of a public company;
An association not carrying on business for profit;
Alternate directorships.

Any person who holds office or acts as a director of more than twenty companies, shall be
punishable with fine which may extend to Rs. 5,000 for each company after the first twenty
companies.

QUALIFICATIONS OF A DIRECTOR
The Companies Act does not lay down any academic qualification for appointment as a
company director. The Act does not lay down any share qualifications for a person to be a
director. A director need not hold any shares and need not be a member of the company.
Though, the articles of association of the company usually give for the share qualification of a
director. Such shares are recognized as qualification shares. The directors are required to have
these shares so that they also have some financial stake in the company. Regulation 66A of T
able A gives that a director necessity hold at least one share. The articles specify the number
or value of shares to constitute qualification shares.

Where the articles give for qualification shares, a director necessity obtain qualification
shares within two months of his appointment. Any provision in the articles requiring a person
to hold qualification shares within a era shorter than two months of his appointment shall be
void. You should note that it is not necessary that a person necessity acquire qualification
shares before his appointment.

The nominal value of the qualification shares necessity not exceed Rs. 5,000 or the
nominal value of one share where it exceeds Rs. 5,000. Any provision in the articles which
requires a director to take qualification shares of more than this amount, shall be invalid.

The holder of a share warrant shall not be deemed to be holder of the shares specified in
the warrant [Section 270(4)].

If a director does not acquire the qualification shares within two months of his
appointment or thereafter does not possess such shares of any time, his office shall
automatically become vacant. Further, he shall be punishable with fine which may extend to
Rs. 50 for every day from the date of expiry of two months upto the date he acted as a
director.

The qualification shares may be obtained through him either directly from the company or
from the market.

The provisions concerning qualification shares do not apply to

Technological directors unless expressly provided in the articles;
Directors on behalf of special interest;
Directors appointed through central government and
In the case of an self-governing private company.

DISQUALIFICATIONS OF DIRECTORS
The circumstances in which a person cannot be appointed as a director of a company are
listed in Section 274 of the Companies Act. A person shall not be capable of being appointed
director of a company if:
He has been establish to be of unsound mind through a competent
court;
He is an undischarged insolvent;
He has applied to be adjudicated as an insolvent and his application is
pending;
He has been convicted through a court of any offence involving moral
turpitude and sentenced to imprisonment for not less than six months
and a era of five years has not elapsed since the expiry of his sentence;
He has not paid any call in respect of the shares of the company held
through him, whether alone or jointly with others, and six months have
elapsed from the last day fixed for the payment of the call;
He has been disqualified through an order of the Court under Section
203, of an offence in relation to promotion, formation, or management
of the company of fraud or misfeasance in relation to the company.
 The Central Government may, through notification in the Official Gazette, remove the
disqualifications listed under clause (iv) and (v) above.

A private company which is not a subsidiary of a public company may, through its
articles, give for additional grounds for disqualification. Therefore , a public company or a
private company which is a subsidiary of a public company cannot give for additional
disqualifications in its articles.

APPOINTMENT OF DIRECTORS
You know that only individuals can be appointed as directors of the company. Any
appointment as a director of the company. Directors may be 'appointed in any of the following
ways (i) through the articles; (ii) through the shareholders in the common meeting; through the
Board of directors; (iv) through the Central Government and (v) through third parties.

Through Articles

The names of the first directors are usually given in the articles of the company. In case
they are not named in the articles then the subscribers to the memorandum are deemed to be
the first directors of the company and they shall hold office until the directors are appointed at
the first annual common meeting.

A person cannot be appointed as director through articles or named as a director, or

named as a proposed director in the prospectus unless he or his authorized agent has signed
and filed with the Registrar his consent in writing to act as such director; and has either (a)
signed the memorandum for his qualification shares; or (b) taken the qualification shares from
the company and paid or agreed to pay for them; or (c) signed and filed with the Registrar an
undertaking in writing to take from the company his qualification shares and pay for them; or
(d) filed with the Registrar an affidavit that his qualification shares, if any, are registered in his
name.

The restrictions, though, do not apply to (i) a company not having a share capital; (ii) a
private company; (iii) a company which was a private company before becoming a public
company; (iv) a company which issues a prospectus after the expiry of one year from the date
on which the company became entitled to commence business.
Through Shareholders

In Common Meeting: The first directors of the company shall hold the office till the first
annual common meeting. According to Section 255 of the Act, directors of a public company
necessity be appointed every year in its annual common meeting. Unless the articles give for
retirement of all the directors at every annual common meeting, at least two-thirds of the total
number of directors necessity retire through rotation. Therefore , only one-third can be the
permanent or non-retiring or ex-officio directors.

At every subsequent annual common meeting, out of the two-thirds directors liable to
retire through rotation, one-third or the number adjacent to one-third necessity retire. The
directors who have been longest in office since their last appointment shall retire, but in case if
the dare of appointment is the similar, the retirement will be determined through an agreement
in the middle of them and if there is no agreement, it shall be determined through draw of lots.

The retiring directors are eligible for re-election. If a person other than a retiring director
wishes to contest the election for directorship, he necessity provide a notice in writing to the
company at least fourteen days before the meeting. The company is then required to inform
the members either through individual notices or through advertisement of at least seven days
before the meeting in relation to the such a candidature.

If the vacancies could not be filled up in the annual common meeting, the meeting is
adjourned for the after that week to be held at the similar time and at the similar lay. If at the
adjourned meeting also the lay of the retiring director is not filled up and that meeting has not
expressly resolved not to fill the vacancy, then the retiring directors shall be deemed to have
been re-appointed as directors.

It should be noted that the appointment of each director in the common meeting necessity
be made through a separate resolution, unless the meeting unanimously decides otherwise. In
other words, two or more directors cannot be appointed through one resolution.

Through Board of Directors: The Board of directors may also appoint

directors in the following cases:
Additional Directors: The Board of directors may, if authorized
through the articles, appoint additional directors. But care should be
taken to see that the total number of directors including the additional
director necessity not exceed the maximum number fixed through the
 articles. Such an additional director shall hold office only upto the date
of the after that annual common meeting.
Alternate Director: The board may appoint the alternate director if the
articles authorize such an appointment. An alternate director is
appointed to act in lay of a director who remnants absent for more than
three months from the state in which the meetings of the Board are
ordinarily held. Such an alternate director shall hold office till the time
when the original director (in whose lay he was appointed) returns or
on the expiry of the original director's term.
Casual Director: If the office of any director falls vacant for some
cause before the expiry of his term of office, such a casual vacancy
may be filled through the Board of directors according to the
regulations of the articles. Such a vacancy may be caused through
death, resignation, insanity, insolvency etc. The person who is
appointed through the Board to fill up the casual vacancy, shall hold
the office only upto the date upto which the director in whose lay he is
appointed, would have held the office.

Through Central Government

To safeguard the interest of the company, or its shareholders, or the public, the Central
Government may appoint such number of directors as the Company Law Board may, through
order in writing, specify. Such directors are appointed to prevent oppression and
mismanagement of the affairs of the company. The Company Law Board may pass such an
order on a reference made to it through the Central Government, or on the application of at
least one hundred members, or of member holding at least ten per cent voting rights. Such
directors are not required to hold qualification shares and they are not liable to retire through
rotation. Though, such directors can be removed through the Central Government at any time
and appoint some other person in his lay.

Through Third Parties

The articles of the company may authorize the third parties to appoint persons on the
Board of directors as their nominee. But the number of directors so nominated necessity not
exceed one-third of the total number of directors. The term 'third parties' here means the
debenture holders, financial organizations, or banks, etc., who have lent money to the
company. The thought behind such appointment is to ensure that the money lent is used only
for the purposes for which it has been lent. Such directors are not liable to retire through
rotation.

You have learnt that for the appointment of every director, a separate resolution has to be
passed. Normally, they are elected through a easy majority. As a result it is possible that the
minority of the shareholders may not be in a location to send their . representative on the
Board of directors. So, Section 265 of the Act gives them an opportunity to have their
representative on the Board. This is done through adopting the system of proportional
representation. The articles may have a provision to this effect through which not less than
two-third of the total number of directors of the company be appointed through the single
transferable vote, or through a system of cumulative voting or otherwise. Such appointments
may be made once in three years and any casual vacancy may be filled up through the Board
of directors.

VACATION OF OFFICE THROUGH DIRECTORS

According to Section 283 of the Companies Act, the office of a director shall become
vacant if -
He fails to obtain or ceases to hold the qualification shares;
He is establish to be of unsound mind through a competent court;
He applies to the court to be adjudged an insolvent;
He is declared insolvent;
He is convicted of any offence involving moral turpitude and
sentenced to six month‟s imprisonment;
He fails to pay any call for six months on shares hold through him;
He absents himself from three consecutive meetings of the board of
directors or from all the meetings of the board for a continuous era of
three months, whichever is longer, without obtaining leave of absence
from the board. But if this absence is not deliberate (he might be ill)
then it will not result in the vacation of office;
He accepts a loan or any guarantee or security for a loan from the
company without the previous approval of the central government;
He fails to disclose to the board his interest in any contract entered into
through the. Company as required through section 299;
 He becomes disqualified through an order of the court under section
203 which restrains fraudulent persons from managing the affairs of
companies;
He is removed through an ordinary resolution of the company;
He had been appointed a director through virtue of his holding any
office and he ceases to hold such office;
He is convicted of an offence in connection with the inspection of
books of accounts and other records through the Registrar.

A private company which is not a subsidiary of a public company may, through its
articles, give for additional grounds on which the office of a director shall fall vacant.

The grounds for vacating the office of director apply to all companies public or private.
On the happening of any of the above events, the director will have to vacate the office. These
rules are applicable, to all directors through whomsoever . appointed and for whatever era
appointed. The Board has no power to waive the event or condone the act.

Retirement of a Director

You know that two-third of the directors are liable to retire through rotation and if a
director retires at an 'annual common meeting and is not re-elected, he ceases to hold the
office.

Resignation through a Director

A director may resign in accordance with the rules laid down in the articles. If the articles
contain no such rule, he can resign at any time through giving are asonable notice to the
company, it is immaterial whether the company accepts his resignation or not. A resignation
once made will take effect immediately when the intention to resign is made clear. A
resignation cannot be withdrawn, except with the consent of the company concerned.

The resignation letter should be sent to the company at the registered office of the
company. The resignation should preferably be in writing, but sometimes even oral
resignation may be effective, for instance, if it is made at the common meeting of the,
company.
REMOVAL OF DIRECTORS
A director can be removed from office before the expiry of his term through (a)
shareholders or (b) Central Government; or (c) Company Law Board.

Removal of Shareholders

A company may remove a director through giving a special notice and passing an
ordinary resolution. Though, they cannot remove (i) director appointed through the Central
Government; (ii) a life time director in a private company; a director on behalf of special
interests e.g., creditors or debenture holders; and a director elected through proportional
representation.

Special notice of fourteen days necessity be given for the resolution to remove a director
at any meeting. On receipt of such a notice, the company necessity forthwith send a copy
thereof to the director concerned, who has a right to be heard on the resolution at the meeting.

If the director concerned has sent a written representation to the company, the company
may send a copy of the similar to all the members. If the representation could not be send
because of the shortage of time, it may be read at the meeting.

A vacancy created through the removal of a director may be filled up through the
appointment of another director in this lay provided special notice of such appointment has
been given to members. A director so appointed shall hold office only for the remaining era of
the director removed. Such a vacancy can also be filled up a casual vacancy. A removed
director cannot be reappointed, but he can claim compensation for loss of office.

Removal through Central Government

The Central Government may remove a director on the recommendation of the Company
Law Board. The Central Government may refer the matter to the Company Law Board if it
feels that the person has been guilty of fraud, misfeasance, negligence or breach of trust, or
that the business of the company has not been mannered according to prudent commercial
principles or the company is supervised through such a person in such a manner as to cause or
likely to cause serious injury to trade, industry or business. If the Company Law Board is
satisfied, it shall recommend the removal of such director. The director so removed shall not
hold the office of a director or any other office linked with the conduct and management of the
affairs of the company for a era of five years. Though, the Central Government may, with the
previous concurrence of the Company Law Board. remit or reduce this era.
 A director who is so removed is not entitled to any compensation for loss of office.

Removal through Company Law Board

The Company Law Board is also empowered to remove the director on an application
made to it for prevention of oppression or mismanagement. Such a person cannot be appointed
in any managerial capability in the company for a era of five years, Also he cannot sue the
company for compensation for loss of office.

POWERS OF DIRECTORS
You know that the directors are appointed to manage and supervise the overall affairs of
the company. So, the Board of directors has the power to do all such things which the
company is authorized or empowered to do. The directors derive their powers from the
memorandum or articles of the company and from dissimilar provisions of the Companies
Act., 1956.

Section 291 of the Act gives that, subject to the provisions of the Act, the Board of
directors of a company shall be entitled to exercise all such powers, and do all such acts and
things, as the company is authorized to exercise and do. Therefore , the Board of , directors
cannot exercise such powers which can only be exercised through the company in the
common meeting.

The powers of the company are therefore divided into two parts: (i) powers to be
exercised through the Board of directors, and (ii) powers to be exercised through shareholders
in a common meeting. Within the limits laid down through the Act and the articles, the powers
of the directors are supreme and the shareholders cannot alter or restrict their powers through
passing a unanimous resolution. The shareholders can amend the articles or take steps to
remove the directors or refuse to re-elect director whose actions they disapprove and appoint
other persons replacing them.

Directors are required to act collectively in the form of Board. Directors individually
cannot take any decision concerning company's affairs, decisions necessity be taken at the
meetings of the Board or through circulation of proposal in the middle of the members of the
Board.

But the Board has the power to delegate authority in sure compliments to an individual
director or to a committee of directors.
 Though the shareholders cannot usually interfere or restrict the powers of the directors,
but, in the following exceptional cases, the common meeting of shareholders may exercise
powers conferred on the Board of directors:
Where the directors act mala fide and against the interest of the
company, for instance, when their personal interest conflict with their
duty towards the company;
Where the board of directors for some valid reasons become
incompetent to act, for instance, all the directors are interested in a
scrupulous transaction;
Where there is deadlock in management i.e., the directors are unwilling
to exercise their powers, for instance, when the directors are equally
divided and, so; cannot come to any decision.

Powers to be exercised through Board only: According to Section 292 the following
powers can be exercised through the Board only through means of resolutions passed at
meetings of the Board:
The power to create calls;
The power to issue debentures;
The power to borrow money otherwise than on debentures;
The power to invest the funds of the company; and
The power to create loans.

The first two powers cannot be delegated through the Board to any committee but the
remaining three powers can be delegated to any committee or sub-committee, if any.

Though, such delegation can be made through the Board through passing a resolution at
the meeting of the Board, which necessity specify the nature and extent of power which can be
exercised through the delegate. The shareholders, in common meeting, can impose .
restrictions or circumstances on the exercise through the Board of any of the above powers.

Other powers to be exercised at Board Meetings. In addition to powers to be exercised at

Board meetings under Section 292, there are some other powers which can be exercised only
at a meeting of the Board, they are as follows:
The power to fill up the casual vacancies on the Board;
The power of sanctioning a contract on which a director is interested;
 The power to appoint or employ a person as managing director or
manager, if he is
Already a managing director or manager of another company;
The power of creation investments in shares or debentures of
companies under the similar management;
The power of getting notice of disclosure of shareholdings through
directors and persons deemed to be directors;
The power to create declaration of solvency in the case of member's
voluntary winding up.

The powers under clause (iii) and (iv) are to be exercised through the Board with the
consent of all the directors present i.e., unanimously. You should keep in mind that each
director shall have only one vote and all matters will be decided [except (iii) and (iv)] through
easy majority of votes. A director cannot appoint a proxy to attend and vote at the meetings of
the Board.

Powers to be exercised with the sanction in common meeting: Section 293 of the Act
imposes sure restrictions on the powers of the Board of directors. There are sure powers which
can be exercised through the Board of directors only with the consent of the company in the
common meeting, they are:
The power to sell, lease or otherwise of the company's undertaking;
The power to remit or provide time for the repayment, of any debt due
through a director;
The power to invest, otherwise than in trust securities, the
compensation received for compulsory, acquisition of 'the company's
undertakings or property;
The power to borrow money in excess of the total of the paid-up
capital on the directors company and its free reserves; and
The power to contribute to any charitable or other funds not directly
linked with the business of the company or the welfare of the
employees beyond rs. 50,000 in a year of 1 per cent of the average net
profits for the last three financial years, whichever is greater.

In case the directors sell or lease the company's property without obtaining the consent in
the common meeting, the title of the buyer or other person who buys or takes a lease in good
faith and after exercising due care and caution, will not be affected. Besides, a company
whose ordinary business is to sell or lease property is not governed through this rule. You
should note that the restrictions are not applicable to an self-governing private company. It
should also be noted that as regards contributions to National Defense Finance or any other
finance approved through the Central Government for the purpose of national defense, Section
293-B empowers the Board of directors to create such contributions without any limit and
without obtaining the sanction of the company in common meeting.

Other restrictions on the powers of the Board: In addition to the restrictions imposed
through Section 293, there are two more restrictions:
Restriction on creation political contributions: According to Section
293-A, Government companies and companies which have been in
subsistence for less than three financial years are prohibited from
creation political contributions. Any other company may contribute
any amount or amounts directly or indirectly to any political party or
for any political purpose to any person. The amount of such
contribution necessity not exceed five per cent of its average net profits
throughout the three immediately preceding financial years. Further,
for creation such contributions, a resolution authorizing such
contribution, should be passed at the meeting of the Board of directors.
Every company is required to provide the necessary information in its
profit and loss account concerning the amount of contribution and the
name of the party or the person to whom the amount has been given.
Restriction on appointment of sole selling or buying agents: The
Board can appoint . a sole selling or buying agent of the company for
any area only after obtaining the sanction in the common meeting of
the company and the appointment can be made only for a term not
exceeding five years at a time.

Managerial Powers of Directors

The directors are the elected representatives of shareholders and are entrusted with the
power to manage the affairs of the company in the best interest of shareholders. The Board of
directors has the following managerial powers:
Power to create contracts with third parties on behalf of the company;
 Power to recommend dividends;
Power to allot, forfeit and transfer shares of the company;
Power to appoint director to fill up the casual vacancy;
Power to take decision concerning the conditions and circumstances
for the issue of debentures;
Power to appoint managing director, manager or secretary of the
company;
Power to form policy and issue instructions for the efficient running of
the business; and lastly
Power of control and supervision of work of subordinates.

DUTIES OF DIRECTORS
You have learnt that directors of a company inhabit an significant location in the
management of the company and they have vast powers, Though, it is expected of them to
exercise these powers for the public good and protect and safeguard the interests of the
company and shareholders.

The duties of directors depend upon the nature and size of the company. While
discharging their duties, they necessity comply with the provisions of the articles and the
Companies Act. The duties given in the articles will certainly vary from company to company.
A director is not hound to provide continuous attention to the affairs of the company, his
duties are of an intermittent nature, to be performed at periodical board meetings.

The duties of directors can broadly be classified under the following two heads:
Statutory duties; and
Common duties.

Statutory Duties

Some of the statutory duties of directors are:

Every director necessity disclose his shareholdings in the company
[Sec. 308].
Every director necessity disclose his personal interest in contracts to be
entered into through the company [Sec. 299],
 Directors necessity not receive any loan from a public company or its
subsidiary of which he is a director in contravention of Section 295.
To hold statutory and annual common meetings and lay before the
company a Balance Sheet and Profit and Loss Account and other
reports.
To convene extraordinary common meeting on the requisition of the
specified number of members.
Directors necessity not receive remuneration in contravention of
Section 309 read with Section 198.
To file with the Registrar the reports and resolutions as required
through the Act.
To uphold books and registers required under the Act and articles.
To perform all such duties as required under the Act and articles.

Common Duties

There are some duties of a common nature which every director necessity discharge. The
following are some of the common duties:
Duty of good faith: The directors inhabit a fid salary location in a
company. Fiduciary location means a location of trust and confidence.
So, directors necessity act honestly and diligently in the interest of the
company and shareholders. They necessity not create any secret profits
from their dealings with the company. If a director creates some secret
profits through utilizing his location, he shall be liable to account for it.
Duty of reasonable care: The directors should discharge their duties
with reasonable care. The degree of care expected from him is the
similar as is reasonably expected from persons of their knowledge and
status. If the directors fail to exercise due care and ability in the
performance of their duties, they shall be liable for negligence. But
they cannot be held liable for mere errors of judgment.
Duty to attend the Board Meetings: The duties of directors are of an
intermittent nature to be performed at periodical board meetings. So, it
is the duty of every director to attend such meetings. Although a
 director is not expected to attend all the meetings of the Board, but if
he fails to attend three consecutive meetings or all meetings of the
Board for a consecutive era of three months (whichever is longer)
without obtaining permission, his office shall automatically falls
vacant.
Duty not to delegate: The directors necessity perform their duties
personally. They are appointed because of their ability, competence
and integrity, so, the maxim delegatus non potest delegare (a delegate
cannot delegate further) is applicable to them. But if permitted through
articles of the company, the directors can delegate sure functions to the
extent permitted through the Act of the articles.
Duty to disclose interest: The fiduciary location of a director requires
him to disclose. Director to the Board his personal interest in any
contract to be entered through the company. This is necessary to
prevent any disagreement flanked by the personal interest of the
director and his duties towards the company. It should be noted that
there is no ban on company entering into a contract in which a director
is interested. What is required is that he necessity disclose this interest.

LIABILITIES OF DIRECTORS
The liabilities of directors can be discussed under several heads.
Liability as shareholder: The director's liability as shareholder is
usually the similar as that of any other shareholder. But a company
may alter its memorandum and create the liability of all or any of the
directors unlimited. This, though, will be effective only if the
concerned director has given his consent to it. Further, the directors are
liable to pay the calls whenever made, within the permissible time. If
calls are in arrears for more than six months, he shall have to vacate
the office of director.
Liability to outsiders: Directors act for the company, as such they
cannot be held personally liable to outsiders for any acts done through
them on behalf of the company. They would, though, be personally
liable to outsiders in the following circumstances:
When they enter into contracts in their own names and not in the name
of the company. For instance, when they sign a negotiable instrument
without mentioning the name of the company, they shall be personally
liable.
Where the directors act ultra vires the company i.e., beyond their
powers, in such a case company will not be liable but directors will be
liable to their parties for breach of implied warranty of authority.
Where they have permitted the issue of a prospectus which contains
misstatements or which does not present the true location, the directors
shall be personally liable.
Where the directors fail to return the application money within the
specified time, if the minimum subscription is not subscribed.
Where there is irregular allotment of shares,
Where the directors act fraudulently, for instance, when they purchase
goods or incur liability at a time when they know that the company
will never be liable to pay the amount,
Liability to Company: Directors have some duties towards the
company through virtue of their office. The directors are liable to the
company in the following cases:
Ultra vires Acts: Directors are personally liable to the company for
ultra vires acts i.e., acts which are beyond their powers. For instance, if
they pay dividends out of capital, they will be liable to the company f6r
any loss or damage suffered due to such ultra vires acts.
Negligence: If the directors perform their functions in a negligent
manner, they incur personal liability to the company. They are, though,
not liable for errors of judgment.
Breach of trust: The directors inhabit a fiduciary location towards the
company. They necessity act honestly and in the interest of the
company. If the directors create some secret profits or use the
company's property for their personal use, then they shall be liable to
the company.
 Misfeasance: The misfeasance means willful misconduct or willful
negligence resulting in some loss to the company. The company can
take action against the directors for damages in case of misfeasance.
Criminal liability: If the directors fail to comply with the provisions of
the Act, they incur criminal liability involving fine or imprisonment or
both. Some of the provisions of the At under which the directors incur
criminal liability are:
Issue of a prospectus containing an untrue statement.
Failure to deposit application money in a schedule Bank.
Fraudulently inducing persons to invest money in the company.
Accepting deposits or inviting any deposit in excess of the prescribed
limit. Destruction, mutilation, alteration, or falsification of any books,
papers, or documents.
Failure to file annual returns.
Default in holding the annual common meeting.
Liability for acts of co-directors: A director is not liable for the acts of
his co directors unless he was a party to it. A director is not the agent
of his co-directors. He cannot be held liable on the ground that he
ought to have exposed the fraud. But a managing director or the
chairman signing the accounts without understanding its implications
cannot escape liability.

MEETINGS OF DIRECTORS
You have learnt that directors exercise their powers collectively at periodical meetings of
the Board. The rules relating to meetings of directors are following:
A meeting of the Board of directors of every company necessity be
held once in every three calendar months and at least four such
meetings necessity be held every year. That Central Government may,
though, through notification in the Official Gazette, exempt any class
of companies from the mentioned rule. This has been done to help
small sized companies where it is not necessary to hold meeting once
in every three months. Though the Act does not state anything in
relation to the lay where the meetings of the Board should be held, but
 since register of contracts and other books are kept of the registered
office, the intention is that such meetings should be held at or close to
the lay of the registered office of the company.
Notice of every meeting of the Board necessity be given in writing to
every director in India at his usual address, The Act prescribes no
scrupulous form of notice or mode of service or length of era of notice.
Therefore even a few minutes notice would be enough. The failure to
provide notice to any director renders the meeting invalid.
The quorum for a meeting of the Board of directors of a company shall
be one-third of its total strength (any fraction to be rounded off as one)
or two directors, whichever is higher. If at any time there are some
interested directors whose number exceeds or is equal to two-thirds of
the total strength, that the remaining directors who are not interested
shall form the quorum throughout that time, provided their number is
not less than two. In a Board meeting quorum necessity be present
throughout the meeting and not merely at the commencement of the
meeting,
If a meeting of the Board could not be held for want of quorum, it shall
stand adjourned till the similar day in the after that week at the similar
time and at the similar lay. If that day happens to be a public holiday,
then it will be held on the after that following day, which is not a
public holiday.
It is essential that all the proceedings of every meeting of the Board
should be recorded in writing in a book described the minute book.
Minutes of every meeting necessity be signed through the chairman in
whose attendance those resolutions were passed or through the
chairman of the after that succeeding meeting. As per Section 289, the
resolution may also be passed through circulation.

REVIEW QUESTIONS
Who are the directors of a company? How are they appointed?
Explain the rules concerning the number of directors and directorships.
Talk about the legal location of directors.
What restrictions have been imposed through the Companies Act in
respect of appointment of directors?
Explain the qualifications and disqualification for the office of a
director.
 PART 4. MEETINGS AND WINDING UP
CHAPTER 11

Company Secretary

STRUCTURE
Learning objectives
Meaning of a company secretary
Qualifications of a company secretary
Secretary in whole-time practice
Appointment of secretary
Removal of secretary
Location of a company secretary
Duties of a secretary
Liabilities of a secretary
Rights of a secretary
Role of a secretary
Review questions

LEARNING OBJECTIVES
After learning this chapter, you should be able to:
Describe a company secretary
Describe the qualifications and appointment of a company secretary
Explain 'the location of a company secretary
Describe the duties and liabilities of a company secretary.

MEANING OF A COMPANY SECRETARY

A secretary is an officer of the company who is appointed to perform the ministerial or
administrative duties. You should keep in mind that it is not his duty to manage the affairs of
the company; he is primarily concerned to ensure that the affairs of the company are mannered
in accordance with the provisions of the Companies Act and articles of association of the
company.

The Indian Companies Act, 1956 (as amended through the Companies Amendment Act,
1974) in Section 2(45) defined a secretary as "any individual, possessing the prescribed
qualifications, appointed to perform the duties which may be performed through a secretary
under the Act and any other ministerial or administrative duties".

The Company Secretaries Act, 1980 defines a company secretary as 'a person who is a
member of the Institute of Company Secretary of India' [Section 2(1) (c)]. The Companies
Amendment Act of 1988 has incorporated this definition in Section 2(45) which now states, ”a
secretary means a company secretary within the meaning of clause (C) of sub-section(l) of
section 2 of the Company Secretaries Act, 1980, and comprises any other individual
possessing the prescribed qualifications and appointed to perform the duties which may be
performed through a secretary under this Act and any other ministerial or administrative
duties”. You will note that with this amendment a statutory recognition has been given to the
members of the Institute of Company Secretary of India.

From the definition or a secretary, the following three points emerge:

Only an individual can be appointed as a company secretary. Therefore
a firm or a body corporate cannot be appointed as a company secretary.
The company secretary should possess the qualifications prescribed
through the Central Government.
The duties of the company secretary are of a ministerial or
administrative nature.

You should keep in mind that a company secretary is not to act independently but he has
to act under the full control of the Board of Directors. He has no authority, except that which
is delegated through directors, to act or enter into a contract or create symbols so as to bind the
company.

QUALIFICATIONS OF A COMPANY SECRETARY

According to Section 2 (45) of the Companies Act, a company secretary necessity possess
the qualifications prescribed through the Central Government from time to time.

Under Section 383-A of the Act every company having such paid up share capital as may
be prescribed, necessity have a whole time secretary. As per the new rules framed in 1988,
this ceiling is Rs, 25 lakhs. Now we have two sets of qualifications — one for such companies
having a paid up share capital of Rs. 25 lakhs or more and—second for such companies
having lesser paid up share capital.

Companies having a paid up share capital of „Rs. 25 lakhs or more

 Every Company having a paid up share capital of Rs. 25 lakhs or more
should have a whole time secretary.
No person can be appointed as whole-time secretary unless he is a
member of the Institute of Company Secretary of India.

Companies having a paid up share capital of less than Rs. 25 lakhs‟. It may not be
possible for small companies to have whole-time secretary. So, companies having a paid up
share capital of less than Rs. 25 lakhs may riot 'appoint a whole-time secretary. Any person
possessing one or more of the following qualification can be appointed as a secretary for small
sized companies.
A member of the 'Institute of Company Secretaries of India;
Any person who has passed the Intermediate examination mannered
through the
Institute of Company Secretaries of India;
Post-graduate degree in Commerce or Corporate Secretaryship granted
through any University in India;
Law graduate from any University;
A member of the Institute of Chartered Accountants of India;
A person holding post-graduate degree or diploma in Management
science granted through any University or the Institutes of
Management Ahmedabad, Calcutta, Bangalore, or Lucknow;
A member of the Institute of Cost and Works Accountants of India;
Post-graduate diploma in company secretaryship granted through the
Institute of Commercial Practice, Delhi, under Delhi Administration or
diploma in corporate laws and management granted through the Indian
Law Institute, New Delhi;
Post-graduate diploma in Company Law and Secretarial Practice
granted through the University of Udaipur, or
A member of the Association of Secretaries and Managers, Calcutta.

A company secretary should also possess some other qualifications. Me necessity have
common knowledge including the knowledge of the industry and trade, then only he can
render useful advice to directors. He necessity have a sound knowledge of dissimilar laws
affecting the business. He should also have knowledge of economics, banking, and finance.
He should have a good personality because he has to get on well with everybody and to get
full co-operation from the staff.

SECRETARY IN WHOLE-TIME PRACTICE

You have learnt that the term 'Company Secretary' here means a person who is a member
of the Institute of Company Secretaries of India. A Company Secretary may accept full time
employment as secretary of a company or he may choose to practice independently as a
company secretary, either individually or in partnership with one or more practicing company
secretaries. According to section 6 of the Company Secretaries Act, 1980 only a member of
the Institute whether in India or elsewhere shall be entitled to practice provided that he has
obtained from the council a certificate of practice.

The Companies (Amendment) Act, 1988 introduced the concept of company secretary in
whole-time practice. According to section 2 (45-A) of the Act, "secretary in whole-time
practice" means a secretary who shall be deemed to be in practice within the meaning of sub-
section (2) of section 2 of the Company Secretaries Act, 1980 and who is not in full-time
employment. Therefore , a member of the Institute in practice and not in full-time employment
becomes a secretary in whole-time practice.

A member of the Institute may practice either individually or with one or more other
members. The Company Secretaries Act, 1980 has specified the areas of practice for company
secretaries. Section 2(2) of the Company Secretaries Act, 1980 has prescribed the following
areas of practice for a company secretaries in practice:
To engage himself in the practice of the profession of company
secretaries to, or in relation to, any company; or
To offer to perform or perform service in relation to the promotion,
forming, incorporation, amalgamation, reconstruction, re-organisation
or winding up of companies; or
To offer perform or perform such services as may be performed
through—
Authorized representative of a company with respect to filing,
registering, presenting, attesting or verifying any documents (including
shapes, applications and returns) through or on behalf of the company;
A share transfer, gents;
An issue house,
A share and stock broker;
A secretarial auditor or consultant;
 An adviser to a company on management, including any legal or
procedural matter falling under the capital issues (control) act, 1947;
the industries (development and regulation) act, 1951; the companies
act, 1956; the securities contracts (regulation) act, 1956; any of these
rules or bye laws made through a recognized stock swap, the
monopolies and restrictive trade practices act, 1969, the foreign swap
(regulation act, 1973; or under any other law for the time being in
force,
Issuing certificates on behalf of, or for the purposes of a company; or
To hold himself out to the public as a company secretary in practice; or
To render professional services or assistance with respect to matters of
principle or details relating to the practice of the profession of
company secretaries; or
To render such other services as, in the opinion of the Council, are or
may be rendered through a company secretary in practice;

The amendment Act of 1988 has also specified sure areas wherein certifications through
secretary in whole time practice have been recognized, namely:
Under section 33(2) of the Companies Act, a statutory declaration in
Form No. 1 of the Companies (Central Government) Common Rules &
Shapes, 1956 for compliance of legal formalities for incorporation of
the company can now be given through a company secretary in whole
time practice.
Under Section 149 of the Companies Act, a company having a share
capital which has issued a prospectus inviting public to subscribe for
its shares, the company cannot commence business unless a duly
verified declaration through a secretary in whole-time practice has
been filed with the Registrar that all the required formalities have been
complied with.
Under Section 161, annual return of a company whose shares are listed
on a recognized stock swap, in addition to being signed through a
director and the manager or the secretary is also required to be signed
through a secretary in whole-time practice.
 Under Section 269 read with Schedule XIII to the Companies Act the
statutory certificates of compliance with the necessities for
appointment of managing director or whole-time director or manager
can given through secretary in whole-time practice.

APPOINTMENT OF SECRETARY
You have learnt that for a company having paid up share capital of Rs. 25 lakhs or more,
it is obligatory to appoint a whole-time secretary. In the case of companies having paid up
share capital of less the prescribed amount, it is not obligatory to appoint a whole-time
secretary. Though, in practice, every company usually appoints a secretary and the necessary
provision is made in the articles of association for that purpose.

Presently like the first directors of the company, the first secretary may be appointed
through the promoters. Such a person helps the promoters in carrying out all the preliminary
work in connection with the formation of the company. Such a secretary is often referred to as
the 'pro tem secretary' (secretary for the time being). Sometimes, the first secretary may be
named in the articles of the association, but this will not provide the person the right to be
appointed as the secretary. He cannot sue the company if he is not so appointed subsequently
through the Board of directors. There should be an self-governing contract flanked by the
company and the secretary so named in the articles. So, the first secretary appointed through
promoters should enter into a fresh contract with the company after its incorporation.

Normally, the appointment of a company secretary is made through the Board of

'directors in their first meeting through passing a resolution. A service agreement is executed
flanked by the company and the secretary in which the conditions and circumstances of his
appointment, remuneration etc. are stated. In big-sized companies, the managing director may
be authorized through the Board to appoint a secretary.

A director, being an individual can be appointed as secretary, but it requires the 'approval
of the company through special resolution, But where the Board of directors of a company
consists of only two directors, then neither of them can be appointed as secretary of the
company.

Section 303 of the Companies Act requires that the particulars of appointment of a person
as secretary necessity be recorded in the Register of Directors/Manager/Secretary and the
requisite particulars relating to such appointment necessity be filed in duplicate in the
prescribed form with the Registrar of companies within thirty clays of appointment.

You should note that no individual can hold the office of secretary in more than one such
company whose paid up capital is Rs. 25 lakhs or more, if the person appointed as secretary
holds an appointment as such in any other company, he has to notify the other company within
twenty days of his appointment. It should further be noted that if a relative of a director is to
be appointed as the secretary, then a special resolution has to be passed in a common meeting
for such appointment [Section 314],

REMOVAL OF SECRETARY
Company that the appointment of a company secretary is usually done through means can
resolution of the Board of directors, as such he can be removed through the Board of directors
or through the managing director, if he is so authorized through the Board.

When 2 secretary is appointed, the conditions and circumstances of his service are stated
in the service agreement. Usually, there is a clause in the service agreement which gives the
manner in which he can be dismissed. The secretary, being an employee of the company is a
servant of the company and his removal is governed through the general law governing the
connection of master and servant. Though, the secretary necessity be given due notice of
termination of his employment in accordance with the conditions and circumstances of his
employment. In case no era of notice is mentioned in the service agreement, a reasonable
notice should be given, otherwise the company shall be liable to pay compensation to him.
Even if the company secretary is appointed for a fix term, the company can remove him
before the expiry of the conditions through giving him a reasonable notice.

The services of a secretary may, though, be terminated without notice for willful
disobedience, misconduct, negligence, incompetence, or permanent disability. When the court
orders for compulsory winding up of the company, the order of the court shall be deemed to
be the notice of discharge of a secretary along with other employees of the company..

LOCATION OF A COMPANY SECRETARY

The location of a company secretary has undergone a tremendous change duting the last
so several years. He has arisen from the location of a clerk to an indispensable figure in the
corporate hierarchy. Though, it is very hard to explain precisely the location of a company
secretary. The Companies Act does not describe the exact location of a secretary. The location
of a company secretary can be discussed under the following headings:
As a Servant of the Company: Lord Esher observed in the course of
his judgment in Barnett Hoares & Co. Vs. The South London
Tramways Co. Ltd. that secretary is a mere servant, his location is that
he is to do what he is told. There is a service agreement flanked by the
secretary and the company and his employment is governed through
the conditions and circumstances of this agreement, so he is an
employee of the company. He is to work under the control of the Board
of directors. He has to carry out the orders of the directors. It is for the
secretary to ensure effective execution and implementation of the
management policies laid out through the Board. He cannot exercise
self-governing desertion in the work assigned to him.
As an Agent of the Company: Since the secretary is concerned with
the administration of the company, he acts on behalf of the company.
The duties of a secretary are of ministerial and administrative in nature.
The routine matters relating staff, workers, trade unions, shareholders
and the outsiders. So he has to use his discretion in dealing with such
matters. He is an significant link flanked by the company and the
outsiders. All policy decisions are conveyed through the secretary to
the staff and outsiders.
As an Officer of the Company: Strictly speaking the secretary is not a
managerial personnel, but he is treated as principal officer of the
company for the purposes of several sections of the Act. He is
responsible for the compliance of several legal formalities under
dissimilar Acts. The Companies (Amendment) Act, 1988 has
particularly specified that a secretary is bracketed with the managerial
personnel, including directors and is liable to punishment through
method of imprisonment, fine or otherwise for violation of the
provisions of the Companies Act. The secretary is required to sign the
annual return filed with the Registrar [Section 161i)], create
declaration concerning commencement of business (Section 149),
authenticate the Balance Sheet and Profit and Loss Account (Section
215), and to create declaration under Section 33(2) of the Act that all
the formalities required through the Act and the Rules therein have
been complied with in respect of registration of a company. The
secretary is recognized as "principal officer” under the Indian Stamp
Act, M.R.T.P. Act, Income Tax Act, Sales Tax Act etc.
As an Advisor to the Board: The secretary plays an significant role
and enjoys a unique location in the management of the company.
 Though the policies of the company are formulated through the
directors, but since the secretary has complete information in relation
to the all internal matters and changes in the policies of the
government, he is in a better location to supply the required
information and advice to the directors. He advises the Board on
several legal matters. He can be described as the real guiding spirit
behind the Board of directors.

It should be clear to you that the location of the secretary has changed in excess of the
years. Though he has no managerial functions to perform, because he is described as a
responsible officer of the company, he is the principal administrative officer of the company.
We can state that while the directors arc the brains of the company, the secretary is its ears,
eyes, and hands.

DUTIES OF A SECRETARY
The duties of a company secretary vary from company to company depending upon its
size, management structure and the personal qualifications of the secretary. In India, in private
and in joint sectors, separately from the secretarial duties, the company secretary is normally
entrusted with legal, administrative and management functions.

In big sized companies, there are separate managers in charge of the functions relating to
accounts, law, and personnel etc. Even in such cases the role of the company secretary as the
coordinator cannot be under estimated. It can be said that the company secretary acts in three
fold capability, namely, as an agent of the Board of directors, as a person' in charge of
secretarial work relating to the company and as chief administrative officer of the company.

The duties of a company secretary can broadly be divided into two categories — (a)
statutory duties, and (b) common duties. The statutory duties can further be subdivided into
two—duties under Companies Act and duties under other Acts,

Statutory Duties

Following are some of the statutory duties of the company secretary under the Companies
Act:
Signing of any document or proceedings requiring authentication
through the company under Section 54.
 Filing of necessary documents and return his with the Registrar of
Companies, e.g. return of allotment of shares, annual returns, annual
accounts etc.
Giving the notice of the augment in the share capital to the Registrar
under Section 97.
Delivering the share certificate within 3 months of allotment or within
2 months of registration of transfer under Section 113.
Creation entries in the Register of Members on the issue of share
warrants under Section 115.
Filing particulars of charges with the Registrar of Companies.
Getting the name painted outside every office or the lay of its business
and to get is engraved on the seal of the company (Section 147).
Creation a statutory declaration for obtaining the certificate of
commencement of business (Section 149).
To create accessible for inspection and furnish copies of register of
members (Section 163).
Sending notice of common meetings to every member of the company
(Section 171).
Filing of sure agreements and resolutions with the Registrar (Section
192).
Keeping minutes of the proceedings of common meetings and of Board
of directors and other meetings. xiii) Maintaining the several registers
and statutory books of the company, such as Register of Members,
Register of Directors, Register of charges etc.

In several of the duties, the secretary shall be held responsible as an officer in default, if
there is a default in complying with the provisions of the Act. A secretary, in the middle of
others has been defined as an officer in default

Duties Under Other Acts: A company secretary has also to see to it that the necessities of
other Acts are also complied with. Under the Income Tax Act, the secretary being the
Principal officer‟ is responsible for the deduction of income tax from the salaries of its
employees and its authentication in the Government treasury. Under the Indian Stamp Act, the
secretary should ensure that several documents like share certificates, transfer shapes etc. are
properly stamped as per the necessities of the Indian Stamp Act.

The secretary is also required to comply with the provisions of several labour and
industrial laws such as The Factories Act, The Industrial Disputes Act, and Minimum Wages
Act. etc.

Common Duties

A secretary is required to perform many common duties as follows:

To carry out the orders of the Board of directors.
To assist the Board in the formulation of policy decisions.
Not to disclose on confidential information relating to the affairs of the
company.
Not to create any secret profits on account of his location.
To net as a medium and link flanked by the company and outsiders.
To give information to the shareholders.
To acquire supervise arid coordinate the office work.

LIABILITIES OF A SECRETARY
You have learnt that it is the duty and responsibility of a secretary to see that the affairs of
the company and mannered in accordance with the provisions of the Companies Act and
articles of association. If a default is made in complying with sure provisions of the Act, a
secretary, being an officer of the company, shall be liable for fine and punishment.
The liability of a company secretary can be discussed under two headings, namely,
statutory liabilities and contractual liabilities.

Statutory Liabilities

You know that a company secretary is an significant officer of the company and he has to
comply with not only the provisions of the Companies Act but also the necessities of the
Income Tax Act, Indian Stamp Act, labour and industrial laws. The company secretary may be
held for the following:
Default in holding the statutory meeting and filing the statutory
statement with the Registrar (Section 165),
 Default in holding the annual common meeting (Section 168), default
in filing a return of allotment (Section 75),
Default in the preparation of share certificate within three months of
allotment and two months after the application for registration of
transfer (Section 113), default in maintaining the register of members
(Section 150), and default in circulating members‟ resolutions of which
they have given notice to the company (Section 188).
Default in getting the name of the company pointed or affixed outside
the registered office and every office or lay of business, and engraving
it on the seal of the company (Section 147), default in filing the annual
returns (Section 162),
Default in recording the minutes of the meetings of the shareholders
and the Board (Section 193),
Default in registering sure resolutions and agreements requiring
registration (Section 192),
Default in maintaining the register of directors (Section 303),
Default in maintaining the statutory registers such as index of register
of members, register of loans, register of charges etc.,
Liability for creation any false or misleading statement. A secretary
can escape from the liability if he can prove that his liability was
expressly excluded either through law or through the articles of the
company or through any resolution of the company. He may also not
be held liable if he can satisfy the court that he has acted honestly and
to the best of his skill under the circumstance. Separately from the
liability under the Companies Act, a secretary shall be liable for fine
and punishment if he violates the provisions of the Income Tax Act,
Indian Stamp Act, and Sales Tax Act .

Contractual Liabilities

In addition to the several statutory liabilities, a company secretary has many contractual
liabilities which arise out of his service agreement, they are as follows:
 He shall be liable for any loss or damages caused to the company
through willful neglect or negligence in the discharge of his duties;
He shall be personally liable if he acts beyond his authority;
He shall be liable to account for the. Secret profits made through him
through virtue of his
He shall be liable to indemnify the company for any loss suffered
through the company as a result of disclosure of some secret
information relating to the company some rights are given to the
secretary through the Act. Board of directors and the common with the
company.
ROLE OF A SECRETARY

The company secretary plays an significant role in company administration. The scope of
his role depends on the size and nature of the company. He is liable not only to The company,
but also to its shareholders, creditors. employees and the society.

Statutory Officer

As a principal officer of the company the company secretary is responsible for strict
compliance with the several provisions of the „Companies Act and the necessities of other
Acts. He is responsible for proper maintenance of books of accounts and other registers. He
has to sign many documents such as annual returns, return of allotment, and declaration for
commencement of business. He is responsible for authentication of the balance sheet and
profit and loss account, for holding meetings of directors and shareholders, and maintaining
minutes of such meetings.

As a statutory officer, the company secretary is responsible to comply with the provisions
of other Acts, such as Income Tax Act, Capital Issues (control) Act, Monopolies and
Restrictive Trade Practices Act, Sales Tax Act, Factories Act, Industrial Disputes Acts etc.

Coordinator

A company secretary is the link flanked by the Board of directors and other executives of
the company. The Board lays down the policy decisions, but it is the secretary who ensures
their proper implementation. He acts as a link flanked by the Board, managing director and the
Chairman on the one hand and with the staff on the other hand. In a company where there are
many self-governing 'departments such as sales, purchase, personnel etc., he acts as a
coordinator with these functionaries for ensuring that the policy decisions are duly accepted
out and if there are some matters which require further consideration, the secretary shall lay
them before the Board and convey the decision of the Board to the concerned department.

The company secretary also acts as a coordinator with trade unionists, auditors,
shareholders of the company, Government and the community at big. He is to ensure the
compliance of the provisions of companies Act and several other Acts. He should see that the
company functions in a manner as to achieve the declared objectives of the Government. It is
now widely accepted that the company has some responsibility towards the society as well.
The secretary can advise the Board concerning the matters where the company can contribute
to the welfare of the society.

Administrative Officer

As a common administrative officer, lie is responsible for efficient administration of the

company. He has to supervise, control, and coordinate the functioning of dissimilar
departments such as finance, personnel, and organisation. He should develop a strong and
efficient organizational structure. He has also to ensure the safety and proper maintenance of
the assets and properties of the company. He has to ensure that they are not misused. The
company secretary is responsible for ensuring that records are maintained properly. With the
fast changes taking lay, a secretary is expected to play a still more significant role in the
administration of the company. He is to assist the Board in laying down the policies and
dealing with the Government and financial organizations.

REVIEW QUESTIONS
Describe the term 'Secretary' under the Companies Act. Who can be
appointed as a secretary of a company?
How is the secretary of a company appointed? State how can he be
dismissed?
State the qualifications which a company secretary should possess.
Talk about the legal location of 3 company secretary state his main
functions.
Talk about the statutory 'and 'contractual liabilities company secretary.
 CHAPTER 12

Meetings and Resolutions

STRUCTURE
Learning objectives
Meaning of meeting and its importance
Types of meetings and their importance
Statutory meeting
Annual common meeting
Extraordinary common meeting
Requisites of a valid meeting
Notice of meetings
Quorum for meetings
Proxies
Voting
Chairman
Resolutions
Minutes
Review questions

LEARNING OBJECTIVES
After learning this Unit, you should be able to:
Explain the meaning of a company meeting
Talk about the importance of company meeting
Explain the several kinds of meeting
List the requisites of a valid meeting
Explain the rules concerning the notice and quorum
Explain the dissimilar kinds of resolutions and the purposes for which
they can be passed.

MEANING OF MEETING AND ITS IMPORTANCE

 Meeting may usually defined as the gathering, assembly or coming jointly of two or more
persons for transacting any lawful business. For proper working of the company, it is
necessary that the shareholders meet as often as possible and talk about matters of mutual
interest and take significant decisions. Meetings give a lay for fruitful participation where free
and frank discussion takes lay. The decisions taken at the meetings usually become acceptable
and are met with least resistance.

To constitute a valid meeting there necessity be at least two persons, because a meeting
cannot be constituted through one person. But there are sure circumstances where one person
can constitute a valid meeting, they are:
Where one person holds all the shares of a scrupulous class, he alone
can constitute a meeting of that class;
Where the meeting is described through an order of the Company Law
Board, the Board may direct that one member of the company present
in person or through proxy shall constitute a valid meeting.

Company meetings play a important role in decision creation procedure. They give an
opportunity to shareholders to review the working of the company and take policy decisions,
thereby controlling the Board of directors. The directors are duty-bound to follow the
decisions taken at the common meeting of shareholders. Meetings constitute a very significant
aspect in the management and administration in the company form of organisation.

TYPES OF MEETINGS AND THEIR IMPORTANCE

Company 'meetings can broadly be classified as follows
Meetings of Shareholders: Such meetings are also recognized as
common meeting of the members which are held to exercise their
communal rights. The meetings of the shareholders may again be of
the following four kinds:
Statutory Meeting;
Annual Common Meeting;
Extraordinary Common Meeting; and
Class Meeting.
Meetings of Directors: The directors are to act collectively in the form
of a board, and the decisions are taken at the meetings of the Board of
directors. These meetings may again be of two kinds:
Meetings of the Board of directors; and
Meetings of the committee of directors.
Other Meetings: These meetings may be either of the following:
Meetings of debenture-holders;
Meetings of creditors.
STATUTORY MEETING
This is the first meeting of the shareholders of a public company and is held once in the
lifetime of any public company. According to Section 165 of the Companies Act, every
company limited through shares or limited through guarantee and having a share capital
necessity hold a common meeting of members of the company within a era of not less than
one month and not more than six months from the date on which the company becomes
entitled to commence business, This meeting is described as the 'statutory meeting' and it
necessity be specially stated so in the notice calling it. A private company is not required to
hold a statutory meeting.

Purpose of Statutory Meeting

The primary objective of holding the statutory meeting is to inform the shareholders in
relation to the facts relating to the formation of the company, shares taken up, money received,
contracts entered into, preliminary expenses etc. It provides an opportunity to the members to
talk about matters relating to the formation of the company. This enables them to know the
location and future prospects of the company. This meeting enables the members to meet the
directors and they can satisfy themselves that the money subscribed through them is being
properly used.

Notice of Statutory Meeting

Statutory meeting is treated as a common meeting and as such 21 days clear notice in
writing necessity be given to all members of the company. In calculating 21 days, the date on
which it is served and the date of the meeting are excluded. A shorter notice will be valid if
consent is given through members holding at least 95 per cent of the paid-up capital carrying
voting rights, or on behalf of at least 95 per cent of the voting power (Section 171). The
consent for a shorter notice may be given either at the meeting or before the meeting.
The notice necessity expressly state that the meeting is the statutory meeting of the
company. A copy of the statutory statement necessity also be sent along with the notice.

Statutory Statement

The Board of Directors is required to prepare a' statement described the 'statutory
statement'. You have learnt that along with the notice convening the meeting, this statutory
statement should also be sent to each Member. If the statutory statement is sent later, it will
still be treated as valid if all the members entitled to attend and vote at the meeting agree to it.
Contents of the Statutory Statement
According to Section 165(3) of the Companies Act, the statutory statement necessity
provide the following information:
The total number of shares allotted, distinguishing those allotted as
fully or partly paid up otherwise than in cash, the extent to which they
are partly paid up, the consideration for which they have been allotted
and the total amount received in cash;
An abstract of receipts and payments of the company upto a date
within seven days of the date of the statement and the balance of cash
in hand;
An account or the estimate of the preliminary expenses of the company
(such as legal charges, charges in connection with the preparation of
memorandum and articles of association, printing expenses,
registration charges) showing separately any commission or discount
paid or to be paid on the issue or sale of shares or debentures;
Names, addresses, and job of the directors, auditors, manager, and
secretary. Changes, if any, in these compliments, since the
incorporation, are also required to be given;
Particulars of any contract which are to be submitted to the statutory
meeting for approval. If any modification or proposed modification of
a contract is to be submitted for such approval, brief particulars of
contracts and particulars of modifications or proposed modification
should also be given;
The extent to which underwriting contracts have not been accepted out,
and reasons therefore;
The arrears, if any, due on calls from directors and from the manager;
and The particulars of any commission or brokerage paid, or to be
paid, in connection with the issue or sale of shares to any director or to
the manager.

The statement necessity be certified as correct through not less than two directors,
including the managing director, where there is one. -With regard to the shares allotted
through the company and the cash received in respect of such shares and the receipts and
payments is also required to be certified as correct through the auditors.

A certified copy of the statutory statement necessity be sent to the Registrar after sending
the statement to the members. At the commencement of the statutory meeting, the Board of
directors shall produce a list of members showing their names, addresses and occupations
along with the number of shares held through them. This list shall remain open and accessible
to any member of the company throughout the continuance of the meeting.

The members present at the meeting are free to talk about any matter relating to the
formation of the company or arising out of the statutory statement, whether previous notice of
the matter has been given or not. But only such resolutions can be passed of which notice has
been given in accordance with the provisions of the Act. If default is made in filing the
statutory statement, or in holding the statutory meeting, every director and other officers in
default shall be punishable with fine which may extend upto Rs. 500, Further, the members
have the right to file a petition to the court for compulsory winding up of the company, if the
meeting is not held or the statement is not filed with the registrar.

ANNUAL COMMON MEETING

The annual common meeting of the company is an significant means through which the
shareholders get the opportunity to exercise their power of control. It is at this meeting that
the directors retire and seek re-election. The shareholders get an opportunity of reviewing and
evaluating the overall performance of the company throughout a year. The shareholders can
lay their views before the management and can seek clarifications on matters in relation to the
which they are not satisfied. Therefore , you note that an annual common meeting is very
significant.
Every company, public or private, necessity in each calendar year, hold in addition to any
other meeting a common meeting as its annual common meeting and the notice necessity
specify that it is the annual common meeting.

The holding of an annual common meeting is a statutory requirement.

Following are the rules concerning annual common meetings:

The first annual common meeting of the company necessity be held
within a era of 18 months from the date of its incorporation, and if
such a common meeting is held within that era, it shall not be
necessary for the company to hold any annual common meeting in the
year of its incorporation or in the following year. For instance, a
company is incorporated on 5th October, 6989 and holds its first
 annual common meeting 10th March, 1991 (i.e. within 18 months of
incorporation), then it need not hold any other annual common meeting
in 1990 and 1991. But from the year 1992 onwards, it necessity hold
such a meeting in every calendar year,
The gap flanked by two annual common meetings necessity not exceed
15 months. The Registrar may, though, for any special cause extend
the above time through a era not exceeding three months.
At least 21 clear days‟ notice of the meeting in writing necessity be
given to every shareholder, directors and auditors of the company, A
shorter notice may also be given if it is agreed to through all the
members entitled to vote at the meeting.
The annual common meeting of the company necessity be described on
a working day throughout business hours either at the registered office
of the company or at some other lay within the city in which the
registered office of the company is situated. Therefore , no meeting can
be described on a public holiday, for instance on 15th August, 2nd
October, and 26th January. If any day is declared through the Central
Government to be a public holiday after the issue of notice convening
the annual common meeting, it shall not be deemed to be a public
holiday and the meeting could be held on that day as scheduled.
The Board of directors can cancel or postpone the holding of the
meeting on the scheduled date, but this power should be exercised
through the Board bonafide and for proper reasons. The better course
for the Board will be to hold the meeting and then have the matter
decided through the meeting.

Consequences of not holding Annual Common Meeting

You learnt that holding of the annual common meeting is a statutory requirement. If a
company creates a default in holding the annual common meeting in accordance with the
provisions of Section 166 of the Companies Act, the following two consequences will follow:
Any member of the company can apply to the Company Law Board for
calling the meeting. On such application, the Company Law Board
 may order the calling of the meeting, or it may issue directions for
calling the meeting, which may even contain a direction that one
person present in person or proxy shall constitute the annual common
meeting. A meeting described through the order of the Company Law
Board shall be deemed to be annual common meeting of the company.
The company and every officer of the company in default shall be
punishable with fine upto Rs. 5,000 and if the default continues, with a
further fine upto Rs. 250 for every day after the first day of default
throughout which the default continues.

The Business to be Transacted

According to Section 173 of the Companies Act, at the annual common meeting ordinary
business is to be transacted. Any other business can also be transacted at the annual common
meeting, but that will be termed as „special * business'. Therefore , the annual common
meeting can transact both ordinary and special business. The following ordinary business is
usually transacted at every annual common meeting:
The consideration of the account, balance sheet and the reports of the
Board of directors and auditors;
The declaration of dividend;
The appointment of directors in the spaces of those retiring; and iv)
the appointment of the auditors and fixing their remuneration.

If any other business is to be transacted at the annual common meeting, it shall be treated
as special business. Special business can be transacted at an annual common meeting provided
the articles of association do not prohibit It and the notice of the meeting mentions it as special
business,

You should note that the ordinary business requires an ordinary resolution, while the
special business may be passed through an ordinary resolution or special resolution as
required through the Act.

EXTRAORDINARY COMMON MEETING

All common meetings of a company other than the statutory and annual common meeting
are described 'extraordinary meetings'. Extraordinary common meeting is a meeting which is
held flanked by two annual common meetings. These meetings are described in emergencies
or on special occasions: This meeting is described to talk about some urgent special business
which cannot be postponed till the after that annual common meeting, for instance, alteration
in the memorandum or articles of association, reduction of capital, issue of debentures etc. All
business transacted at such meeting is deemed to be special business.

An extraordinary common meeting may be described through

Board of directors on its own motion;
the Board of directors on the requisition of members; or
the requisitions themselves; or
the Company Law Board.
Through the Board of Directors: Clause 48 of Table A states that "the
Board may, whenever it thinks fit, call an extraordinary common
meeting,” Though, the Board has to gas the resolution for convening
such meeting.
Through the Board on requisition: According to Section 169 of the
Act, the Board of directors necessity call an extraordinary common
meeting of the company on the requisition of required number of
members. The requisition letter for calling this meeting necessity be
signed through members holding at least one-tenth of the paid-up
capital and having a right to vote an the matter of requisition. In the
case of a company having no share capital, it necessity be signed
through those members who have at least one-tenth of the total voting'
power. The requisition necessity state the purpose for which the
meeting is requisitioned and it necessity be deposited at the registered
office of the company. You should note that only such matter can be
taken up at the meeting which is specified in the requisition. On receipt
of a valid requisition, the Board of directors should, within 21 days,
move to call a meeting and the meeting necessity actually be held
within 45 days of the date of deposit of the requisition. A notice of 21
clear days is necessary for calling the extraordinary common meeting.
A duty has been imposed on the management to disclose, in an
explanatory statement all material facts relating to every special
business to enable the members to form a judgment on the business.
 Through the Requisitianist: If the Board of directors fails to call the
meeting within 21 days and the meeting is not held within 45 days of
the deposit of the requisition, the requisitionists may themselves
proceed to call the meeting. But the requisitionists necessity hold the
meeting within three months from the deposit of the requisition. Such
meeting necessity, as almost as possible, be held in the manner as
described through the Board of directors. When the requisitionists
themselves call a meeting, they may recover the reasonable expenses
incurred from the company, and the company may deduct such amount
from the amount of remuneration payable to the directors in default.

If the meeting is described through requisitionists, it can only transact the special business
for which it has been expressly convened. The resolutions, which are properly passed at such
requisitioned meeting, shall be binding upon the company.

Through the Company Law Board: Under Section 186 of 'the Act, the Company Law
Board is empowered to call, hold or conduct such a meeting, if for any cause it is
impracticable to call or conduct an extraordinary common meeting. The term 'impracticable'
means not possible to call, hold or conduct the meeting in accordance with the provisions of
the Act and Articles, for instance, if the meeting cannot be described because of the rivalry of
two groups.

The Company Law Board may order for the calling, holding and conducting such a
meeting either on its own motion or on the application of any director of the company or of
any member of the company who would be entitled to vote at the meeting. The Company Law
Board should use this power sparingly and on being influenced that it is in the superior interest
of the company. While calling a meeting, the Company Law Board may provide such
directions as it thinks fit, including the direction, that one member present in person or
through proxy would constitute the quorum.

Like any other common meeting, the notice of the extraordinary common meeting
necessity also be given at least 21 days before the date of the meeting specifying the date, time
and lay of the meeting. The notice necessity also specify the special business to be transacted
at the meeting. You should note that unlike an annual common meeting, extraordinary
common meeting may be held on any day including a public holiday. The meeting may be
held at a lay other than the registered office of the company or even outside the city in which
the registered office is situated.
REQUISITES OF A VALID MEETING
The decisions taken at the common meeting shall be valid and binding only if the meeting
itself has been properly described and mannered. Any irregularity in calling or conducting the
meeting shall invalidate the proceedings of the meeting. The company meetings necessity be
mannered in accordance with the rules and regulations laid down in the Act (Section 171 to
186) and the articles of association. The following are the requisites of a valid meeting:
Proper Authority: The meeting shall be valid only when it is described
through a proper authority. The proper authority to convene the
meeting is the Board of directors. The Board of Directors should pass a
resolution at its meeting to call the common meeting, otherwise the
notice calling the meeting will become invalid and the proceedings of
the company shall not be effective (Harban V. Phillips). Therefore , a
notice issued through the secretary without the authority of a resolution
of the board is patently invalid. Though the Board of directors is the
proper authority to convene a common meeting, but under sure
circumstances the meeting may be described through requisitionists or
through the Company Law Board.
Proper Notice: 'Notice' means an advance intimation of the meeting so
as to enable the person concerned to prepare himself for it. A proper
notice should be given to every member, auditors, and directors of the
company and to every such person who is entitled to attend the
meeting. The notice necessity be clear and should state the purpose for
which the meeting is described. The notice necessity be in writing and
it necessity be given at least 21 clear days before the date of the
meeting, You should note that deliberate omission to serve notice to
one or more members will invalidate the meeting. But an accidental
omission will not render the meeting invalid. Likewise, the non-receipt
of the notice will not affect the validity of the meeting. The notice
necessity state the date, time and lay of meeting.
Quorum: Quorum means the minimum numbers of members whose
attendance is necessary at the meeting for transacting the business of
the company. In the absence of a quorum, no meeting can be held
every resolution passed at a meeting without quorum shall be invalid.
 Chairman: Every common meeting of the company should be
presided in excess of through a chairman. The chairman has to be there
to conduct the meeting In a proper and smooth manner. The articles
usually give the mode of appointment of the chairman of a meeting. If
the articles do not give otherwise, the members who are personally
present at the meeting shall elect one of themselves to act as the
chairman of the meeting. The chairman should act bonafide and in the
interest of the company, he necessity act in an impartial manner.
Properly Mannered: It is essential that the business at the meeting
necessity be mannered according to rules. Company meetings are held
for discussing scrupulous issues relating to the company ” working and
taking a decision on the similar. The matter should be placed in the
form of a resolution, it should be discussed thoroughly, amendments to
it should be cautiously measured and then it should be decided through
voting through illustrate of hands or poll.
Proper Record: A proper record of the proceedings should be kept in
the Minutes Book. Every company is required to uphold minutes of the
proceedings of every common meeting and meetings of the Board and
its Committees. When the minutes are confirmed and signed through
the chairman, they are acceptable in a court of law as proof of the
proceedings. '

NOTICE OF MEETINGS
The normal rule for any meeting of shareholders of a public company is that the meeting
should be described through giving a notice of not less than 21 clear days. 'Though, a private
company may give in its articles for a shorter notice. The essentials of a valid notice are:
It necessity clearly state the date, time and lay of the meeting as also
the purpose. of the meeting,
The notice necessity be issued on the authority of a resolution of the
Board of directors. .
The notice should be signed through a person authorized through the
Board. Usually, a director of the Board or the company secretary
would sign the notice.
 It necessity be sent to all persons who are entitled to receive the notice.

The words ”clear days notice” indicate that the day of serving the notice and the day of
meeting are excluded. Therefore in normal practice, 21 clear days would mean 23 days.
Further, if the notice is to be sent through post, another 48 hours are to be added to the 23
days. Therefore the notice necessity be sent at least 25 days before the date of the meeting. 'A
shorter notice can also be given. In the case of annual common meeting, all the members
should consent to the shorter notice and in the case of any other meeting, members holding not
less than 95% of the paid-up share capital or voting rights should consent to it. The consents
can be given either before or at the meeting, and has to be given in the prescribed form.

Persons Entitled to Notice

The persons who should be sent the notice of any common meeting are:
Every member of the company;
Persons entitled to a share in consequence of the death or in solvency
of the member;
Auditors of the company for the time being;.
Public trustees in respect of holdings to which Section 153B is
applicable.

Further, if the notice pertains to the meeting of a scrupulous class of shareholders, then , it
should be sent only to the shareholders of that class.

QUORUM FOR MEETINGS

A quorum is the minimum number of persons who necessity be present in order to
constitute a valid meeting. If there is no quorum, the meeting shall not be valid and the
business a valid meeting. If the quorum is not present, the meeting shall not be valid and in
transacted at such meeting will be invalid. The main purpose of having a quorum is to avoid
decisions being taken at a meeting through a small minority which may not be acceptable to
the vast majority of members.

Usually, the quorum is fixed through the articles of the company. According to Section
174 of the Companies Act, unless the articles give for a superior number, five persons
personally present (and not through proxy) in the case of a public company and two persons
personally present in the case of any other company, shall constitute the quorum for a
common meeting of the company.
 If within half an hour from the time appointed for holding a meeting of the company, a
quorum is not present, the meeting, if described upon the requisition of members, shall
stand dissolved (Section 174(3) in any other case, if there is no quorum within half an
hour from the time fixed for holding the meeting, the meeting shall stand adjourned to the
similar day in the after that week, at the similar time and lay, or to such other day and at such
other time and lay as the Board may determine.

If at the adjourned meeting also, there is no quorum within half an hour from the time
appointed for holding the meeting, then the members present shall form the quorum. But you
necessity keep in mind that there necessity be at least two persons to hold the meeting. These
provisions are also applicable to private companies, if the articles do not give otherwise.

According to Article 49 of Table A, the quorum necessity be present at the time when the
meeting begins and proceeds, to take up business. It means that the quorum necessity, be
present at the beginning of the meeting and it need not be present throughout or "at the time of
taking votes on any resolution. But as regards the meetings of the Board of directors,, the
quorum necessity be present throughout the meeting. You should note that a quorum is
presumed unless it is questioned at the meeting.

PROXIES
The term 'proxy' is used both for the person who is authorized to act and vote for another
at a meeting of the company and the instrument through which such a person is named and
authorized to attend the meeting. Section 176 of the Companies Act, states that any
member of a company who is entitled to attend and vote at a meeting of the company, is
entitled to appoint another person as his proxy to attend and vote instead of himself. Therefore
, any person may be appointed as a proxy whether he is a member of the company or not.

Unless the articles give otherwise: (a) a proxy cannot be appointed in the case of a
company having no share capital and (b) a member of a private company cannot appoint more
than one proxy to attend on the similar occasion. The instrument appointing a proxy necessity
be in writing and signed through the appointor or his attorney duly authorized in writing and
necessity be stamped. The instrument appointing a proxy should be deposited with the
company forty eight hours before the commencement of the meeting. Any provision in the
articles of the company requiring the proxy form to be deposited earlier than 48 hours will be
invalid.

The proxy has no right to speak at the meeting, but he can put questions in writing and
sending the similar to the Chairman for answer. For each meeting a separate proxy is required.
A proxy can demand a poll and unless the articles otherwise give a proxy is not allowed to
vote except on a poll.

Every notice of a meeting necessity clearly state that a member is entitled to appoint a
proxy and that the proxy need not be a member. If default is made, every officer in default
shall be punishable with fine upto Rs. 500. But no invitation to appoint any person as proxy be
made at the expense of the company and in case any such invitation is issued, the officer in
default will be liable to fine upto Rs. 1,000.

Every member entitled to vote at a meeting of the company is entitled to inspect the
proxies deposited at any time throughout the business hours. You necessity keep in mind that
a proxy is always revocable, but it can be revoked before the proxy has voted. For revoking
the proxy, the company necessity be informed. Death or insanity of a member appointing the
proxy revokes the proxy, but proper intimation to the company is necessary. If the member
appointing the proxy personally attends and votes at the meeting, the proxy shall stand
revoked.

VOTING
You have learnt that the business of the company is transacted at meeting. A motion
becomes a resolution when it is duly passed at the meeting. The shareholders have the right to
talk about every proposed resolution and propose amendments therein. After the motion is
discussed, it is put to vote. The voting may be (a) through illustrated of hands or (b) through
taking a poll.

Through Illustrate of Hands

At any common meeting, a resolution put to vote is decided first through illustrate of
hands. On a illustrate of hands, each member shall have one vote. Unless the articles
otherwise give, proxies are not entitled to vote in case of such voting, The chairman counts the
hands 'for' and 'against' a resolution and declares the result and when it is recorded in the
minutes it becomes a conclusive proof of the information. Though, the dissatisfied
shareholders may challenge the validity of the passing of the resolution or they may demand a
poll.

Through Taking a Poll

If there is dissatisfaction in relation to the result of voting through illustrate of hands a

poll can be demanded. The chairman on his own motion may demand for the poll. The poll
may also be demanded even before the declaration of the result on a illustrate of hands.
 In the case of a public company having a share capital, a poll may be demanded through
any member present personally or through proxy and holding shares having not less than one
tenth of the total voting power or, on which not less than Rs. 50,000 has been paid-up. In the
case of a private company having share capital, a poll may be demanded through one member
personally present or through proxy if seven such members are personally present in the
meeting or through two members if more than seven members are present. You should note
that as soon as a demand for poll is made, all decisions taken through voting through illustrate
of hands stands cancelled.

In a poll, the voting rights of a member are in proportion to his share of the paid-up equity
capital of the company. If the articles so give, members holding shares on which calls are in
arrears or in regard to which the company has right of lien, may not be allowed to vote in a
poll.

The demand for poll may be withdrawn at any time through the person or persons who
made the demand. When more than one resolution is put to vote, poll should be taken on each
separately. A poll demanded on the question of adjournment of the meeting . necessity be
taken immediately and in all other cases, the chairman necessity take poll within 48 hours of
the demand for poll.

The chairman of the meeting shall appoint two scrutineers to scrutinise the votes given on
the poll, and to statement thereon to him. Out of the two scrutineers, at least one shall be the
member of the company but he should not be an officer or an employee of the company. The
result of the poll shall be deemed to be a decision of the meeting on the resolution on which
the poll was taken.

CHAIRMAN
Chairman is the person who has been designated or elected to preside in excess of and
conduct the proceedings of a meeting. A chairman is necessary for conducting at meeting
properly. He is the chief authority in the meeting, he is the umpire of, debates, and he
regulates the meeting.

Articles usually give the mode of appointment of the chairman of a meeting, But if there
is nothing in the articles, the members personally present at the meeting shall Meetings and
Resolutions elect one of themselves to be the chairman of the meeting. If a poll is demanded
on the election of the chairman, it necessity be taken forthwith and a chairman is elected for
the purpose. You should note that these provisions as given in Section 175 of the Act are
applicable only if there is no provision in the articles.'
 Regulations 50 to 520 f Table A state the rules concerning the appointment of chairman.
The articles usually give at the common meetings of the company. If there is no such
chairman or if he is not present within fifteen minutes of the' time fixed for holding the
meeting, or is unwilling to act as chairman of the meeting, the directors present shall elect one
of their member to be chairman of the meeting. If at any meeting no director is willing to act
as chairman or if no director is present within fifteen minutes of the time fixed for holding the
meeting, the members present shall choose one of themselves as the chairman.

The chairman has prima facie authority to decide all questions which arise at a meeting
and which require decision at the time. He has the power to provide his ruling on points of
order, to expel any unruly member, to adjourn the meeting if it becomes impossible to conduct
the meeting smoothly, to regulate the taking of poll, to sign and date the proceedings of the
meeting. If so authorized through the articles, the chairman may provide his casting vote to
decide the issue where the members are equally divided for and against the resolution.

The chairman necessity see to it that the proceedings of the meeting are mannered
according to the rules, that proper order is maintained at the meeting, that proper opportunity
is given to members to express their views. He should see that the voting is fair and the sense
of the meeting is properly ascertained on each and every motion.

He necessity act bonafide at all times and in the interest of the company.

RESOLUTIONS
Decisions of the members at a common meeting are expressed through method of
resolutions. At the meetings a definite proposal in the form of a 'motion' is placed, it is
discussed thoroughly and finally is gut to vote. When the motion is gassed through a majority,
it is described a resolution. In easy words, resolution means the decision taken at the meeting.

The Companies Act gives for three kinds of resolutions that may be passed at the
common meeting of a company — (i) Ordinary resolution; (ii) Special resolution; and (iii)
Resolution requiring special notice.

Ordinary Resolution

An ordinary resolution is one which is passed through a easy majority, that is to say that
the votes cast in favor of the resolution exceed the votes cast against the resolution. For
instance, if at a meeting where, say, 81 members cast their votes in a manner that 41 cast votes
in favor and 40 against the motion, the ordinary resolution is said to be taken as passed. The
voting may be either through illustrate of hands or through poll. An ordinary resolution is
required to pass the annual accounts, to declare dividend, to appoint auditors, to elect
directors, to issue shares at a discount etc.

Special Resolution

A special resolution is one which is required for transacting special business and is
required to be passed through a three-fourths majority. The voting may be either through
illustrate of hands or through polls. In determining the three-fourths majority, all the votes
cast through members, whether personally or through proxy, are measured.

According to Section 189(2) of the Companies Act, a resolution shall be a special

resolution when: i
The intention to propose the resolution as a special resolution has been
duly specified in the notice calling the common meetings;
The notice has been duly given of the common meetings; and
The votes cast through members in favor of the resolution are not less
than three times the number of votes cast against the resolution.

The special resolution is necessary to transact significant business. The articles of the
company may specify purposes for which a special resolution is required. The Companies Act
has also expressly required the passing of special resolution on sure matters. The following are
some of the instances where special resolutions are necessary:
To alter the memorandum of association;
To alter the articles of association;
To make reserve capital;
To reduce capital;
To pay interest out of capital;
To allow a director to hold office of profit in the company;
For voluntary winding up of the company.

Resolution Requiring Special Notice

A resolution requiring special notice is, in information, not a kind of resolution, but is a
type of ordinary resolution for which a prior notice of intention to move the resolution has to
be given to the company. With regard to sure matters, a special notice is required to be given
of a resolution to be moved at a meeting of the company. The substance is to provide members
enough time to consider the proposed resolution. Where special notice of a resolution is
required through the Act or the articles, the notice of the intention to move the resolution
necessity be given to the company at least 14 full days before the date of the meeting. On
receipt of such a notice the company necessity provide notice of the resolution to the members
at least seven days before the meeting either individually or through an advertisement in a
newspaper having an appropriate circulation or in any other mode allowed through the
articles.

According to the Companies Act, a resolution requiring special notice is required to

transact the following business:
To remove a director 'before the expiry of his term;
To appoint an auditor in lay of the retiring auditor;.
To appoint a new director in lay of the removed director;
To pass a resolution that retiring auditors shall not be reappointed.

MINUTES
The Companies Act, gives that every company necessity stay the minutes of the meetings
containing a fair and correct summary of all proceedings of the meetings. The minutes of a
meeting should be recorded within 30 days of the meeting in the books described the minute
book, kept for the purpose. Each page of the minute book should be initialed and last page
signed and dated through the chairman of the meeting: The minutes duly signed through the
chairman are presumptive proof that the meeting was duly described and held and all
proceedings duly accepted out. The minutes book should be kept in the safe custody so as to
avoid any tempering of the similar. The minutes of a common meeting should also be signed
within 30 days of the meeting, through the chairman of the meeting or any other authorized
person. The minutes book relating to the common meeting is open to inspection of any
member of the company without charge throughout business hours at least for 2 hours.

Further, a member of the company is entitled to be furnished within Seven days of his
request with a copy of any minutes of the common meeting op payment of such sum as may
be prescribed for every 100 words or part thereof. ”

REVIEW QUESTIONS
What are the dissimilar kinds of meetings of a company? Explain the
purpose of holding such meetings.
What are the requisites of a valid meeting?
What is a statutory meeting? When is it held? What business is
transacted at such meeting?
What is a statutory statement? What it necessity contain?
What is 'notice' of a meeting? Explain briefly the rules concerning the
notice of common meeting.
What is the significance of annual common meeting? What business is
usually transacted at such meetings?
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